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Investing.com — Boohoo .com (LON:BOOH) is investable again.
The U.K. fashion chain’s stock rose 8.8% on Friday after an independent review of its supply chain practices by leading lawyer Alison Levitt concluded that it hadn’t committed any criminal offenses in turning a blind eye to low pay and unhygienic and exploitative conditions at its suppliers’ factories in Leicester in England’s East Midlands.
As a result, the company looks likely to avoid expensive remedial action or the resignation of key management figures, the threat of which has weighed on the stock since the summer, when the Sunday Times revealed how Boohoo’s suppliers treat their workforce, which consists largely of immigrants from the Indian sub-continent.
Ms Levitt’s review, published on the company’s website, has some strong criticisms of how management ignored the plight of those who stitch together its five pound party dresses, but it also found that the company had already started to address the issues by the time they were revealed.
“The allegations of unacceptable working conditions and underpayment of workers are not only well-founded, but are substantially true,” Levitt wrote. “Commercial concerns such as growth and profit were prioritized in a way which made substantial areas of risk all but invisible at the most senior level.”
She noted weak corporate governance had allowed the problem to be hidden from senior management “for many years” – although the practices were an open secret to anyone with an interest in the matter. Textiles is a business that famously “follows the cheapest needle”, and the ethnic and social profile of its suppliers’ workforce screamed “vulnerability!” to anyone with an eye to see.
Levitt rightly reserves some blame for authorities who also chose to look the other way, saying their inaction “contributed significantly to the deficiencies…If the law is not enforced, this sends a clear message that the violations are not important and the people affected do not matter.”
Most encouragingly for investors, Levitt acknowledged that the company had already taken steps to correct the injustices before they were publicly exposed, a powerful defense against any accusations of bad faith. She also endorsed the analyst consensus that Boohoo’s business model doesn’t depend on abusive practices, for all that it relies on cheap labor.
That’s a relief because the business model is undeniably successful. The group is forecasting 25% revenue growth in the current fiscal year, and the performance of online-only fashion this year has surely raised the chance of an upside surprise when the company releases its interim results next Wednesday.
“The adaptations which Boohoo should make involve a relatively easily-achieved realignment of its priorities and governance systems,” Levitt said. “The Board should not feel discouraged. It has already made a significant start on putting things right.”
Even after this morning’s rise, Boohoo shares are still 11% below where they were before the Sunday Times’ revelations, suggesting that there is still a performance gap to close. Its chief rival in the U.K., ASOS (LON:ASOS), has risen some 60% in that time, helped by switches out of Boohoo, so expect that trade to be at partially reversed too.
If you can turn a blind eye to screamingly expensive multiples as well as Boohoo management did to sweatshop exploitation, then this one is probably for you.
