Boohoo: why we’re buying not crying

Boohoo Group plc (AIM:BOO) has been in the news a lot lately. And not for the right reasons.

This online retailer of cheap women’s clothing manufactures around 40% of its inventory in the UK.

That’s unusual. Most companies use cheap labour in Vietnam and Bangladesh. And it is the source of a lot of recent negative publicity. It was originally alleged that workers in factories used by Boohoo (not workers employed by Boohoo) were subject to poor working conditions and illegally low pay.

In July Boohoo commissioned an independent review of its Leicester supply chain.

In September the company released the findings in full to the public. The review found that the allegations were substantially true and that senior Boohoo directors knew about it. It goes on to describe Boohoo’s monitoring of its supply chain as inadequate, its corporate governance as weak and its risk management systems as “significantly undeveloped”.

“Boohoo’s monitoring of its Leicester supply chain has been inadequate for many years. Its internal processes were well below the standard which would be expected of a company of its size and status.
This was attributable to weak corporate governance. I find that Boohoo’s risk management systems were significantly undeveloped. Commercial concerns such as growth and profit were prioritised in a way which made substantial areas of risk all but invisible at the most senior level.” – Alison Levitt QC, Independent Review into the boohoo Group PLC’s Leicester supply chain

Sounds like a great investment, doesn’t it?

Growing pains at Boohoo

Well, it’s now one of the top ten holdings in the Forager International Shares Fund and I think it can be a great investment. Like a talented teenager making her first life blunder, Boohoo can use the experience of 2020 as a wake-up call. Not only can that be good for shareholders, but it can also be good for the entire UK manufacturing industry.

Mahmud Kamani and Carol Kane founded Boohoo in 2006 as an online retailer that designed, sourced and sold its own brand of cheap women’s clothing. The company has increased revenue at an average annual rate of 55% over the past nine years, generating more than £1bn of sales in the past 12 months.

Until 2016, the Boohoo brand generated 100% of group sales. Now there are seven distinct brands under its umbrella, including the wildly successful Nasty Gal. This company is a world-class marketing machine with a highly loyal and large customer base.

It is profitable, cash generative and has no financial debt. Exactly what I like to see in a retailer. Management also has a lot of skin in the game, with insiders owning around 20% of the company’s outstanding shares. They clearly have a vested interest in Boohoo’s success.

A genuine commitment to change

No one should be proud of what’s happened over the past few years. But I have never seen a company more genuinely committed to rectifying the issues. It released the entire 234-page report to the public, warts and all.

Ms Levitt did not find any evidence of criminal activity and does not accept the allegations that Boohoo’s business model relies on the exploitation of workers. The report also notes that directors put actions in place to address the issues once they were aware of them. Just not fast enough. She thinks the problems are fixable:

“I am confident that the adaptations which Boohoo should make involve a relatively easily-achieved realignment of its priorities and governance systems and that the Board should not feel discouraged. It has already made a significant start on putting things right.”

Actions, not words

And the company has already taken enormous strides.

Upon releasing the independent review to the public, Boohoo committed to implementing all of the recommendations and released a detailed list of actions it would undertake as part of an ‘Agenda for Change‘ programme. The list included the appointment of internal and external experts, discussing supply chain compliance at every Board meeting and publishing a full list of its UK suppliers. Since the release, Boohoo has undertaken a number of those actions.

In September the company hired Andrew Reaney as Group Director of Responsible Sourcing. Mr Reaney appeared alongside Boohoo founder and Chairman Mahmud Kamani for questioning in front of parliament’s environmental audit committee. He confirmed that Boohoo’s supply chain auditors have conducted more than 400 unannounced audits of factories in Leicester since his appointment. The audits have resulted in the company ceasing to work with 64 suppliers due to a lack of transparency.

Last month, Boohoo appointed retired judge Sir Brian Leveson (Chair of the Leveson Inquiry into the British media) and KPMG to oversee the ‘Agenda for Change’ programme. Sir Leveson will report directly to the Board and his reports will be made public. With such high profile appointments and a commitment to publishing the findings, it’s likely we’ll be seeing significant improvements in Boohoo’s supply chain over the coming years.

Running away would be easy

Plenty of retailers’ set up their supply chains in low labour cost countries, where the cost of producing goods would likely be significantly lower than in Leicester factories. It would be easy for Boohoo to transfer its UK manufacturing to these lower-cost countries, too. Mr Kamani confirmed as much when he appeared alongside other Boohoo executives at the above questioning.

“It’s very simple, very easy for us to move this production offshore. But we are still big supporters of UK manufacturing … Lots of people in the fashion industry have moved offshore. We are here and sometimes it feels like we are getting punished for it.”

Boohoo wants to keep jobs in the UK, and the company is committed to making it work.

We’ve watched most of this saga from afar. The share price has continued to fall. But, in our opinion, the company has made commendable changes to its business model. It has grown quickly and, like lots of successful young companies, has learned that with success comes responsibility.

Our recent investment is because it seems to have learned that lesson well. Not only can Boohoo be a wonderful financial investment, but a good corporate citizen too.

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Research Analyst

Chloe joined Forager at the end of 2017 as a research analyst for the Forager International Shares Fund. She was previously employed by both KPMG and Deloitte in corporate finance roles, working on M&A advisory and restructuring engagements.

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