01/10/22: Boohoo takes a slump

What happened?

Boohoo's market value has taken a massive slump by 87% in the last year.

The fast-fashion retailer has also issued a sales and profit warning, which made shares decline by more than 10% in early trading-their lowest level since 2016.

Source: Boohoo Help Team, Twitter

Why have I chosen this story?

I've ordered a couple of items from Boohoo before. Al though their prices are affordable for many, it's how they make their items so low that has always been a question for me. I've also seen the company in the news for their working conditions for those in their supply chains.

I thought it would be interesting to look into an online fast-fashion retailer that was seemingly doing well during the start of the pandemic in 2020, and now seems to be struggling to attract customers.

Let's add some context:

Boohoo is an online only fast-fashion retailer that caters mainly toward 18-24 year olds, in a range of products, from dresses, to shoes, accessories and beyond. The company was founded in 2006 by co-founders Carol Kane and Mahmud Kamani, who are also the current Executive Director and Executive Chairman of the company respectively.

They have been through a series of negative press, such as their low pay and poor working conditions for employees at a Leicester factory, which lead to many fashion retailers to drop the brand.

Boohoo's total revenue for the 3 month period to 31 May 2020 was £367.9m, an increase of 45% on the year before. In 2021, Boohoo reported a profit of £124.7m. This is significantly down from the £7.8m profit for the 12 months to February 28 2022.

One reason for their increased profit in 2020/1 was because of the Covid-19 pandemic. Lockdown meant that many people were ordering their items and products online, which obviously benefitted online retailers more, as opposed to physical retailers.

Source: Drapersonline.com

Possible factors:

- The Cost of Living Crisis. I think this is one of their major reasons to Boohoo's slump. Oil and gas prices are still very high in the UK, and it has meant that customers are paying more on their energy bills (needs). Energy bills for millions of households will go up from 1 October 2022, which will mean even more money will be spent on energy bills. However, Liz Truss' Energy plan will help to cushion the effects of this increase for many. However, it leaves them with much less spending power to spend on their wants, such as buying new clothes, for example.

Source: Internationalinvestment.net

Clothing retailers will be seeing the effects of such customer decisions on their profits and revenue. You could say that it's not all doom and gloom for fast-fashion retailers, because many will still try and find ways to limit their energy bills. More products that keep people warm, such as blankets, jumpers and cardigans could be purchased (especially since we will be entering the Winter season soon).

- Their £1.99 charge on returns. In July, Boohoo announced that they would be charging customers a £1.99 fee on items they wished to return. It was met with a lot of criticism. The timing may not have been the best, but I understand why they made the move. Their revenue and profits were taking a hit back then too, and they needed to bring in some revenue somewhere else in the business.

- Consumers and investors are being more aware of what they buy and invest in. Boohoo is an online fast-fashion retailer and they cater towards fast-fashion trends, that ie, social media and celebrities introduce. These fast-fashion trends change very quickly. As the world is being more and more aware of climate change, and world leaders come together to try and play their role in mitigating/reducing this in conferences, such as the UN Climate Change Conference (COP 26), more people are starting to make changes. One of which can be said that people are moving away from fast-fashion retailers, and onto more sustainable stores and brands.

Source: Devex.com

I believe that a large part of the third point, is also because of the rise in ESG (Environmental, Social and Governance). Many investors use various ESG criteria's to narrow down companies that align with their values (a company's brand and reputation has increased in importance over the years). A company that is doing well on the ESG side of things may be more attractive to socially and environmentally conscious investors, which is always a good thing for both/all parties. Banks also take into account a company's ESG rating, which can translate into a lower regulatory risk and a cheaper cost of capital.

Analysis (S.W.O.T):

S- I mean businesses who have to issue a sales and profit warning isn't a good sign. However, this could give them the chance to go back to the drawing board, see the current part of the business that isn't doing so well in this season, and re-strategise.

W- They're a fast-fashion brand that has come under a lot of negative scrutiny for the working conditions in their supply chains. How employers treat their employees is an important factor for any company to seriously consider (think about the 'S' in ESG). It means Boohoo is expected to make less revenue and profit this year. If the current crisis continues, it could see the company loosing even more money...which is not what any company wants.

O- Since more customers and investors are being more socially and environmentally aware of what they buy and invest in, it could give Boohoo a chance to implement factors that cater to this growing trend. They are known for being an online fast-fashion retailer, but there is still room to accommodate changing customer desires. Take Pretty Little Thing for example, they have introduced the PLT Marketplace, which allows people to buy and sell pre-owned items. I think that more customers will continue to buy more second-hand items and clothing and sustainable wear- Boohoo should take a page out of PLT's book! (I think they will make the same or a similar move, since Boohoo owns PLT anyways).

Source: Retail Gazette.co.uk

T- Nobody knows when this crisis will end. This week has been a particularly hard one for the UK economy. Kwasi's recent mini-budget announcement has rattled the UK market, but global markets too. The pound is currently low against the dollar, which means commodities we buy in dollars are more expensive, such as oil and gas...

Source: The Mirror.co.uk

My thoughts:

I think that Boohoo will make some sort of pre-owned/sustainable sector to its brand, (I even think they have to, as it could result to less customers, less investors and more negative scrutiny from the public). Boohoo isn't the only company to see a slump in sales and/or predict a lower than expected revenue for this year. Payments company, Affirm released a lower than expected outlook for the next quarter of 2022. It just goes to show how the current climate we're in, is affecting all types of businesses and many will have to adapt and ride this wave out.

Scrapping their £1.99 returns fee could go some way in attracting some customers, but even if they did, it would be a short-term solution to a potentially long-term problem...

Aaaand that's it for this week's story, I hope you have enjoyed it! What are your thoughts? Do you think Boohoo will manage to get their profits up in the future?

Until next time, stay curious!