There has been a lot of media comment on fast fashion retailer Boohoo (BOO) after publicity on the working conditions in the clothing industry in Leicester where at least some of its products are produced. The suggestions are that people are paid less than the legal minimum wage and work long hours in poor conditions, even possibly breaching Covid-19 regulations. The company has launched an immediate review led by a QC into these allegations, although the company has other sources of supply overseas and it seems that those produced in Leicester may simply be repackaged there.
The company also came under attack from shorter Shadowfall who published a damaging dossier in May which you can find on the web. The share price has been as high as 400p this year, but fell to close at 224p last night. However it’s making a sharp recovery today.
I don’t currently hold the shares but I did hold them from 2014 to 2017/18 and made considerable profits as a result. Last night the share price was back to near where I sold. Should I buy back into the shares is a question I face and my answer is probably not. These are my reasons:
The company has obviously been on a roll in the last few years with revenue doubling in the last 3 years. They have exploited the growth in the use of the internet for clothes shopping in the same way as ASOS, thus leaving traditional retail stores in their wake. With low price clothes that appeal to the young to the extent that some of it is disposable after one use, they have established a new business model with associated marketing channels.
Financially they have a very high rating as investor enthusiasm for the growth story means they are now on a historic p/e of 53. But there are a whole range of issues that are of concern, some of which are apparent from the Shadowfall report. I particularly focus below on the non-financial aspects because as I say in my book Business Perspective Investing, accounts cannot be relied upon and it’s best to look at other aspects of a business.
Are there any barriers to entry in this business is one key question? Are they doing something that cannot be copied by competitors? Will their profits and profit margins be eroded by lookalike competitors in the traditionally fierce rag trade?
A few years ago, it might not have been easy to set up an internet retailing operation, but now everyone knows how to do it and it does not cost much either. The traditional clothing retailers and supermarkets may be catching up fast even if Boohoo have built a big customer base. But I suspect their customers are fickle, being young and impulsive and might easily be poached by others with lower priced promotions.
Shadowfall points out that one of the company’s competitors is ISawItFirst.com who even appear to be selling apparently identical products. That company is majority owned by the brother of BOO’s Chairman. Another oddity is that BOO owns 66% of PrettyLittleThing with an option to buy the rest. That company is also a competitor and is run by the son of BOO’s Chairman.
The company also acknowledges in its latest announcement that the current board comprises 4 executive directors and 3 non-executive directors, i.e. there is no majority of non-execs as usually expected for larger companies – and BOO is large with a current market cap of about £3 billion.
In summary, this looks like a company for short term speculation rather than long-term investment to me. Not my ideal investment proposition without even looking at their financials and the questions raised on them.
There is also a big risk there will be more bad news about their operations revealed in due course. Once a company comes under a spotlight, any dirt that was previously swept under the carpet tends to be revealed.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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