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Of Lyttle comfort

8 Jul 2020 By Dasha Afanasieva

Years of red flags over working conditions at Boohoo suppliers are finally catching up with biggest shareholder and co-founder Mahmud Kamani. Shares in the 3 billion pound UK fast fashion group are down more than 40% this week – a 250 million pound personal hit given his 12.5% holding. Despite renewed efforts to get a grip on the problem, investors are doubting the viability of the company’s business model.

It’s a step in the right direction that Chief Executive John Lyttle has earmarked 10 million pounds to investigate claims Boohoo’s UK suppliers aren’t paying staff the minimum wage or observing Covid-19 restrictions. But the 10%-plus fall in the company’s shares on Wednesday suggests shareholders aren’t reassured. The numbers show why.

In the year ending February 2021, analysts expect Boohoo to spend 726 million pounds acquiring the clothes it goes on to sell, according to Refinitiv. In a 2017 report, Boston Consulting Group and Global Fashion Agenda estimated around a quarter of these costs are typically wages. In Boohoo’s case that would mean close to 190 million pounds, an estimated 75 million pounds of which goes to workers in the United Kingdom.

Boohoo’s suppliers probably can’t afford to swallow any wage hikes. Campaigner Labour Behind The Label says it is impossible for them to maintain wholesale prices while paying workers the national minimum wage of 8.72 pounds an hour. Assume therefore that Boohoo foots the bill for higher UK salaries. That would wipe out half the company’s 151 million pounds of forecast EBITDA, according to Breakingviews calculations. Even an average 20% pay rise for British workers would amount to a 10% EBITDA hit.

Boohoo has two alternatives. It could move production for the two-fifths of its products it makes in the United Kingdom to cheaper factories abroad. Or it could raise the prices it charges for items like dresses that can cost as little as 5 pounds each.

Doing the former would increase production times and do little to improve labour conditions. Raising prices would make it harder to compete with the likes of Missguided, which also sells cheap garb for youngsters, but does not have a stock market listing and is therefore less susceptible to public scrutiny. Meanwhile, overlong inaction could make it harder to keep social media influencers on side. All of which adds up to a pretty chafing strategic straitjacket.

 

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