Boohoo share price: supply chain review sends stock higher
An independent review into Boohoo’s supply chain has uncovered ‘many failings’ but cleared the company of any serious wrongdoing, sending shares higher ahead of its interim results next week.
- An independent review into Boohoo’s supply chain in Leicester has uncovered ‘many failings’ but cleared the business of any serious wrongdoing, including profiting from cheap labour or breaking the law
- Boohoo is taking action based on the recommendations of the review, including hiring new directors and establishing its own factory in the city
- Boohoo says its financial performance will not be impacted by the changes it is making
- The release of the review has removed a huge cloud of doubt that would have hung over the company’s first-half results next week
Boohoo publishes independent review into supply chain
Boohoo commissioned the investigation after the Sunday Times levelled serious accusations at Boohoo in early July, claiming factories supplying the business were underpaying staff and providing sub-par working conditions. Although Boohoo paid for the 11-week long review it was carried out independently by Alison Levitt QC.
Boohoo supply chain review ‘makes for some uncomfortable reading’
Boohoo’s deputy chairman Brian Small admitted the 234-page review ‘makes for uncomfortable reading’ at times, with serious failings being identified – particularly around Boohoo’s corporate governance.
The investigation found ‘the allegations of unacceptable working conditions and underpayment of workers are not only well founded, but are substantially true’, and that Boohoo had failed to adequately monitor its suppliers ‘for many years’.
‘Its internal processes were well below the standard which would be expected of a company of its size and status,’ the review said. ‘Boohoo’s extraordinary commercial growth has been so fast that its governance processes have failed to keep pace - It has concentrated on revenue generation sometimes at the expense of the other, equally important, obligations which large corporate entities have.’
It added that, a lot of the time, ‘Boohoo has simply no idea where its clothes are being made and thus has no chance of monitoring the conditions of the workers who make them,’ and that it has not felt responsible for conditions in its Leicester factories ‘on anything other than a superficial level’.
In response to the allegations that increased demand for Boohoo during lockdown fuelled the spread of coronavirus in Leicester, the review said Boohoo had taken advantage of the uptick in demand but took ‘no responsibility for the consequences’ that could arise for its supplier’s workers. ‘However, I received no evidence that the company’s purchasing practices are responsible for an increased Covid-19 rate in Leicester,’ Levitt said.
Levitt found that Boohoo has been aware of poor conditions in the factories for some time, stating the board knew by December 2019 at the latest if not earlier, and whilst it had already tried to tackle the issues before the Sunday Times article it had simply been ‘too little too late’.
‘On occasions it has failed to appreciate that with the enormous advantages of being a publicly-listed company come responsibilities, one of which is on all occasions to act in the best interests of all the shareholders,’ the review said.
Boohoo cleared of most serious allegations
But, while the report does not clear Boohoo of any wrongdoing, it has cleared the company of the most serious allegations.
Most importantly, the review said Boohoo did not ‘deliberately’ allow suppliers to offer poor conditions to staff or ‘intentionally profit’ from it, and said there is ‘no evidence that Boohoo has committed any criminal offences’.
‘I do not accept that Boohoo’s business model is founded on exploiting workers in Leicester,’ Levitt said.
’It has been alleged that Boohoo’s business model is dependent on the profits which can be made from the deliberate exploitation of the Leicester supply chain, safe in the knowledge that there will be little scrutiny. I do not accept this; I am satisfied that there are sound legitimate business reasons for Boohoo using Leicester to manufacture clothing but for this to be the case going forwards it may require a change of approach, not least in terms of how Boohoo educates and trains its buyers.’
In a nutshell, Levitt and her team are of the view that, while Boohoo should have monitored and scrutinised its supply chain better, it simply isn’t Boohoo’s responsibility because it does not employ the staff, even if it is in Boohoo’s interest to know what is going on.
How is Boohoo responding to the supply chain review?
The review has encouraged Boohoo to use the review as a chance to ‘be a tremendous force for good’ within the UK’s garment industry if it can change the way it works with its suppliers, but warns inaction will see these problems happen again ‘with the concomitant likely effect on its share price’.
It has laid out a long list of recommendations as to how the company can rectify things, which Boohoo has said it will implement.
‘The group recognises that in order to effect real change in the Leicester textile industry, further clear, strong, and measurable actions are needed in addition to those that the group was undertaking. The board has reviewed and is wholly supportive of Ms Levitt’s recommendations, and intends to implement these in full,’ Boohoo said upon the release of the review.
Recommendations were suggested to be implemented immediately, within a year and over the longer term – which means it may take up to three years for Boohoo to fully implement all of them.
But, to begin with, Boohoo is building on the action it has already taken and is starting with strengthening its corporate governance. Discussing the supply chain will now be a priority at every board meeting. It is in the process of appointing a ‘highly experienced and respected individual’ to oversee the management of its ‘change agenda’.
Two non-executives will also be appointed to the board to ensure it has more independent directors, one of which will be held by someone with experience in Environmental, Social and Governance (ESG) matters. It has already appointed a new director of responsible sourcing.
It is also establishing a couple of new committees, one to evaluate risks and the other to monitor compliance within its supply chain. The immediate concern will be to ensure its supply chain is complying with coronavirus regulations.
One finding of the review was that Boohoo has too many suppliers – so many that it doesn’t actually know how many it has, which makes it impossible to monitor them. The review says the ‘best estimates’ suggest the company has around 200 direct suppliers (Tier one), which in turn are supplied by up to a further 300 Tier two suppliers. Boohoo has said it intends to consolidate its suppliers and try to find new ones that ‘have a track record of ethical and sustainability policies’. This will be supported by Boohoo’s decision to publish a supplier list on an annual basis to improve transparency.
This will be underpinned by a new a state-of-the art manufacturing facility based in Leicester, which will serve as a centre of excellence and help suppliers drive up standards and skills. That is a big step for a company that, today, makes no clothing. Boohoo outsources all manufacturing and is asset-light, driven by two distribution sites that send products to customers around the world. It is not clear how much Boohoo intends to make.
Will the supply chain review lead to higher costs for Boohoo?
The big fear for Boohoo is that this review would reveal its low-cost model was underpinned by cheap, unsustainable labour. The review said a sample of 49 suppliers found 35 ‘had at least one non-compliance in relation to payment of the national minimum wage in at least one audit’. Although evidence suggests some workers were being paid anywhere between £2.50 to £5 per hour, it said the biggest problem was poor tracking of working hours rather than direct evidence of underpaying staff.
Boohoo admits ‘some workers in our supply chain have not always been properly compensated for their work’ but seems confident it can introduce the sweeping changes to overhaul its supply chain without impacting its financial performance.
‘We are confident that we can successfully embed all of the independent review’s recommendations into our business model, without impacting lead times or financial expectations,’ Boohoo said.
‘Taken with the continued growth in the scale of our business, the group remains well-positioned to lead the fashion e-commerce market in the future and successfully implement an agenda for change in UK garment manufacturing.
Boohoo believes it can do this by ordering more goods from fewer suppliers, giving them more reliable and valuable orders which, in turn, should give them the ability to run their factories properly and legally.
Boohoo removes biggest threat to first-half results
Boohoo originally said the review wouldn’t be released until early next year but recently said it would publish the review alongside its first-half (H1) results on Wednesday 30 September. However, after surprising the market by releasing the review early, it has now paved the way for its interim results to be well-received.
There was little doubt that its performance, which is expected to have remained strong despite the investigation, would have been overshadowed by the investigation. But, with that now out of the way, Boohoo will be able to garner a warmer reception to its results.
Analysts are expecting revenue to rise 35% year-on-year, which should provide momentum to the recovery in Boohoo shares. Shares have recovered almost 70% since hitting a low on 15 July but they remain around 13% below the all-time high it hit at the end of June before the Sunday Times article broke.
Still, this is not the end of the matter. Boohoo seems to have been cleared of the worst allegations and investors now know what it needs to do to rectify the situation, but what is less clear is how this will change its business model over the long term and how much it will all cost.
The actions it is taking – from overhauling the supply chain and ensuring people are paid correctly to establishing its own factory and hiring new staff - will not be cheap. For now, Boohoo says its business and financial model will be unaffected by the dramatic changes it will have to make, but some will remain unconvinced that will be the case as time goes on.
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