Can Boohoo shares survive a potential US import ban?

Updated: Mar 4

On Tuesday 2nd of March, news broke that Boohoo was under investigation from the US Customs and Border Protection agency in reference to a potential import ban on goods from the Manchester-based fast fashion supplier. This news stemmed from an investigation last summer from the Sunday Times, which alleged poor working conditions and illegal wages for staff working for Leicester-based textile companies that supplied Boohoo and PrettyLittleThing.

Two boohoo models; one in a short, long-sleeved bodycon mauve dress who is facing towards the camera with her hands on her hips. The other in a light blue tank top and light blue leggings facing to the left of the image with her left hand positioned on her hip; she is positioned in front of the model in the mauve bodycon dress. They stand partially in front of a white wall and a blue cloudless sky.

Image Courtesy of Boohoo

With this high profile exposé from the Sunday Times, there were bound to be repercussions and potential further instances of backlash for Boohoo down the line. However, I have detailed my thoughts on a previous occasion as to Boohoo’s response to the scandal, and I do believe they have overhauled their ethics and overall supply chain standards since the exposé (explained in the management ethics section of the Quality Stock Picking page here). It is important to consider that the investigation from the US Customs and Border Protection agency isn’t an instance of further malpractice, it is a backlash from prior malpractice, which does make a difference.

With regards to this latest news, let's take a look at what the actual sources of Boohoo and the petitioning lawyers at campaign group ‘Liberty Shared’ have to say.

Firstly, the petition was filed by Duncan Jepson, Managing Director of Liberty Shared, and you can read the reports here. Liberty Shared aims to prevent forced labour in the private sector and has had success with its petitions to the US CBP agency previously — as recently as December 2020, the CBP agency excluded a palm oil supplier from the list of US imports due to a petition from Liberty Shared. In Boohoo’s case, Liberty Shared filed two separate petitions; one for the exclusion of Boohoo from US imports and one for the exclusion of goods from factories in and around East Leicester due to the likelihood of a contribution to the supply chain from forced labour sources. The petitions are pretty damning and refer to the Levitt Report issued by senior barrister Alison Levitt QC in September 2020. Some key arguments from the Liberty Shared petitions were that:

  • Boohoo’s business model operates on low-cost garments, which, in order to be commercially viable, likely involve labour violations in the supply chain.

  • Included in the petition, The University of Leicester study argued wage slips in the Leicester area were falsified with the intention of being ‘topped up’ by government benefits.

  • Leicester is a vulnerable community with a large amount of non-English speaking residents, division of local communities through language and a level of deportation fears that prevent residents from speaking out.

  • The risk management tools implemented by Boohoo PLC since the exposé have not been enough.

Whilst these arguments do come from credible sources, I personally believe convincing an agency like the US CBP would be difficult to do without tangible evidence. Arguments such as Boohoo operating a low-cost model or that people fear speaking out against unfair practices would be very difficult to argue proof. Looking at the case that Liberty Shared won against the palm oil supplier Sime Darby Plantation Berhad, Liberty Shared disclosed physical interviews that had been disclosed with workers under the company's control, which showed a great deal of evidence of malpractice.

Boohoo’s response to these petitions can be viewed here. Their initial response outlined that they have yet to hear anything from the US Customs and Border Protection agency and reassured that Boohoo and its brands are still currently fulfilling orders across the US. Boohoo also explained that they will look to work with any authority to assure on supply chain standards and have been working in unison with the UK authorities over the recent months. Some of the key points Boohoo has provided as rebuttals to the petition are:

  • Their appointment of Sir Brian Leveson PC, who will provide independent oversight of the Group's Agenda for Change programme.

  • Their appointment of Bureau Veritas and Verisio to support the ethical audits of suppliers and subcontractors, together with enquiry and enforcement specialists headed by former Deputy Commissioner of the Metropolitan Police Tim Godwin OBE to support Sir Brian's independent enquiries.

  • The completion of over 400 on-site audits on UK suppliers.

  • Their removal of 64 suppliers from the Group's UK supplier list, who did not meet the Group's standards on the levels of transparency required.

  • Their appointment of KPMG as consultants to advise and monitor the implementation of the Agenda for Change programme.

The reports of forced labour in the Leicester supply chain certainly make for uncomfortable reading. However, looking at the comprehensive list of amendments Boohoo has made to its ethics, standards and compliance structures, I do believe this is a company that understands that its future depends on procuring garments from a responsible source. Furthermore, looking at prior cases of exposure to poor working practices, it has done considerably more than many other well-known companies have done in the past (Primark and Nike to name two).

So, what is the risk to Boohoo’s business should their products be banned from importation to the US?

Well, in the ten months to December 31st 2020, the US represented revenues of £370 million for Boohoo, growing at roughly 67% year on year. This is the fastest-growing segment of Boohoo’s already pretty rapidly growing business — its largest market, the UK, grew at 38% for the same period. In Boohoo’s annual report, it does not break out the profitability from its US segment, but I would imagine it to be considerably less profitable than their UK business, as they are yet to grow to significant scale and distribution costs will be much higher than in their home market.

The reason Boohoo chooses to manufacture its goods in the UK at a higher cost than internationally is due to speed. By having shorter shipping lead times than manufacturing in say Bangladesh, Boohoo manages to stay closer to trends and provide fashion that customers want. Therefore, the online-only model saves Boohoo essential margin, as they don’t have to pay for physical stores. I mention this because I believe that Boohoo’s main edge on the fashion market comes from their ability to follow trends very closely and respond to them quickly — if you look at the brand matrix from their recent presentation, Boohoo aims to shift even their recently acquired brands into the ‘trend led’ space.

A diagram of Boohoo Group's current brands (boohoo, Nasty Gal, PrettyLittleThing and MissPap), alongside their newly acquired brands Warehouse, Oasis, Coast and Karen Millen. The diagram shows that boohoo, Nasty Gal, PrettyLittleThing and MissPap are all brands that are trend led and low price. Oasis, when acquired by Boohoo Group, was mid to low price and not trend led, and Boohoo are aiming to make it more trend led. Similarly with Warehouse, when acquired by Boohoo they were not trend led (although they were higher than Oasis) but Boohoo Group aim to make them the same level of trend led to their current brands (boohoo, Nasty Gal, PrettyLittleThing and MissPap). Boohoo Group then aim to make coast lower in price, but allow it to remain exactly between being 'feminine fashion' and 'trend led'. Then with Karen Millen, they aim to make the clothes cheaper and more trend led.

I think that one of the keys to Boohoo’s future is the setting up of manufacturing facilities, like their new best in class Leicester facility (born as a result of the labour scandal) in priority markets to service their local geographies.

If the petition is successful, although I am sure Boohoo’s legal team will fight strongly against it, then Boohoo’s UK goods will be excluded from the import list to the US. However, this doesn’t necessarily mean Boohoo will be forced to stop doing business in its key growth market. Boohoo’s trajectory of growth in the US means the brand has built up significant equity already, and as I mentioned above, Boohoo could easily set up manufacturing facilities in the US or outsource to an approved supplier to the US to circumvent the restriction. In the short term, it may cause some supply challenges, but I would expect Boohoo’s management to already be working on mitigation strategies in light of the recent petition.

It is for these reasons that I do not believe the recent news of the petition to exclude Boohoo from the US import list should be a reason to sell Boohoo PLC, as the risk from the initial uncovering of Boohoo’s labour scandal was already evident. In the case restrictions are placed on Boohoo’s export to the US, I would consider that there are enough opportunities for Boohoo to adapt its supply chain or work with authorities to rectify the situation. I believe that in the long-term, their key growth market can remain an opportunity.