Boohoo becomes a battleground for investors

Investing

Boohoo is a battleground stock. Since its IPO in 2014, the £3.5bn fast-fashion ecommerce company has been the subject of enthusiasm and scepticism in equal measure.

The narratives being spun by both sides of the trade are pretty easy to follow. Bulls rightly point to Boohoo’s industry-leading profit margins, double-digit revenue growth and effective social media presence as signs the business is executing its business plans well. Bears, meanwhile, have long raised questions on its loose governance structure and cite concerns over some of its Leicester-based suppliers whose working conditions would make the Victorians squeamish.

Like many contested stocks of the past decade, bulls have been the ones rewarded, with the share price rising fourfold from its public debut through to last year’s end. Since the New Year, however, it’s been a different story.

Following reports by The Sunday Times in July of serious inadequacies in parts of its supply chain, the stock has whipsawed as Boohoo sought to alleviate concerns that it was profiteering from cheaper-than-legal labour.

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Cut to September, and the publication of an independent report commissioned by Boohoo seemingly removed some pressure. Although lawyer Alison Levitt and her team found widespread evidence of unacceptable conditions at some of its suppliers, the document said the company did not intentionally profit from or cultivate them. A company pledge to clean up its act followed, helping the stock rise 20 per cent to £3.90, just below its all-time high.

Boohoo investors hoping for a period out of the media ring, however, would have been dismayed by news last weekend that its auditor, PwC, has resigned and the National Crime Agency is investigating one of its suppliers on suspicions of money laundering and VAT fraud. Gravity took hold of the stock and by Tuesday it had collapsed by almost a third, before bouncing a tad after management bought the dip the next morning.

Analysts are nonplussed by the noise. Peel Hunt dismissed the developments as “nothing new to see here”. Number crunchers at Mirabaud — the team that infamously set a price target of zero on Wirecard — said “this is one dip that we think is an opportunity”. It is a song sung in unison, it seems, with 15 out of 21 analysts still positive on the stock.

Judging whether this chorus is slipping out of tune is tricky. Most of this year’s events will not have been much of a surprise to followers of the fast-fashion industry. Over a decade ago, Channel 4 found evidence of grossly underpaid workers in Leicester and, in 2018, the Financial Times pulled the curtain back on the city’s “dark factories”.

So questions over whether woke millennials will eventually vote with their wallets are easily swotted away by the fact that, so far at least, they have not.

Governance concerns, however, are harder to dismiss. Some investors may point out that, like its supply-chain problems, many of the governance issues at Boohoo — such as large director bonuses linked to share price performance and related party transactions — are well documented and, therefore, irrelevant.

But PwC’s resignation has clearly intensified investor jitters, and the reported reticence of its big-name competitors to bid for the contract should give holders further food for thought: not least because weak oversight can often manifest itself in ways that remain invisible until the last moment, as investors in stricken former FTSE 100 member NMC Health found out earlier in the year before it fell into administration.

Boohoo, to its credit, has promised widespread governance reforms in the post-Levitt era, including the appointment of two more independent directors to the board and the formation of a new supply-chain compliance committee. With so much change happening so quickly, however, there is some scepticism over whether it will go smoothly.

On fundamentals alone, it is easy to see why Boohoo’s big investors, such as Jupiter Asset Management and Baillie Gifford, are sticking with the company. Boohoo is trading on a valuation of 33 times 2021’s estimated earnings. That might not seem cheap at first glance but profits rose 51 per cent in the first half of the year. And the valuation is a discount to rival Asos, which trades on a multiple of 42 times.

But with so many question marks hanging over the business, it is hard to argue this discount is not justified. Cheap companies, as they say, are often cheap for a reason.

jamie.powell@ft.com

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