Home Stock & Shares Boohoo Share Price Plunges 23% On Supplier Working Conditions Scandal

Boohoo Share Price Plunges 23% On Supplier Working Conditions Scandal

by Jonathan Adams

Online fashion retailer Boohoo yesterday saw its share price nosedive by 23%, wiping around a quarter off the company’s value. Investors took flight after reports emerged over the weekend of illegally low wages and “totally unacceptable” working conditions in supplier factories.

The scandal, uncovered by a Sunday Times investigation led by a journalist who secured a job at a factory in Leicester manufacturing garments for the Nasty Gal label, brings to an end a strong run for the Boohoo share price. The online fast fashion retailer was one of the few in its sector to benefit from lockdown.

The housebound but fashion-conscious young demographic that is Boohoo’s customer base ordered stylish homewear online for delivery, which helped maintain the company’ strong sales growth. That had seen the company’s share price gain an incredible 163.5% between its mid-March low point and a June 26th high.

boohoo group plc

However, a good chunk was taken out of those share price gains yesterday as it reacted to the Sunday Times investigation by admitting that employment conditions at the Leicester factory were “totally unacceptable and fall woefully short of any standards acceptable in any workplace”.

The undercover journalist behind the investigation revealed that he was ‘told to expect’ pay of between £3.50 and £4 an hour. The legal national minimum wage for over 25s is £8.72. A failure to maintain social distancing guidelines in the workplace while Leicester was in the midst of a new spike in Covid-19 cases was also highlighted.

Boohoo has said that while the factory “is not a declared supplier and is no longer trading as a garment manufacturer”, and did not know why its clothes were being produced there, it would urgently review how it controls its suppliers.

There have been warnings to fashion retailers and the government over a practice of illegal sub-contractors operating in Leicester’s garment industry for some time now. Former MP Mary Creagh investigated the fast-fashion industry in her role as chairwoman of the Commons’ environmental audit committee. She told how new factories would pop up within days of their illegal predecessors having been shut down. Unsafe and exploitative working conditions are said to be the norm in these fly-by-night operations.

Boohoo’s strength, especially during the coronavirus crisis, has been a flexible production base able to quickly respond to new trends. It was able to cancel orders for its usual spring and summer lines and shift production to homewear when the pandemic hit. But there will now be serious questions over whether it is genuinely possible for Boohoo to ethically produce garments at the price points that have made the company so successful.

If the scandal will inflict longer term damage on the Boohoo brand image and share price than yesterday’s flash crash remains to be seen. Analysts at stock broker Peel Hunt yesterday kept the stock as a “buy”, arguing that consumers show little interest in ethical issues.

However, others are less convinced. Matthew Earl, a short-seller who helped to expose the recent scandal at German fintech payments company Wirecard, believes there could be far deeper repercussions for Boohoo. He believes that if the investigation has uncovered how it is possible for Boohoo to manufacture garments that can be sold so cheaply, that calls into question the entire business model. In a scathing tweet he remarked:

“We now know how Boohoo has achieved its supernormal profit margins for so long.”

Important
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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