A little history
boohoo (OTC:BHHOF) (OTCPK:BHOOY) (yes, no capital) is an online fast fashion retailer that has, for whatever reason, managed to tap into the desires of the younger generation in Britain and increasingly in Europe and the United States. That’s the business to concentrate upon.
However, there’s more than a little upset about the very model that fast fashion works upon. Cheap clothes to be worn only a few times for that younger generation does also mean intensive pressure upon costs in the supply chain. As well as the usual whining about resources being used, why can’t we all just buy less but better and so on.
I do actually know quite a lot about the people doing the whining and it’s the same thing we’ve been seeing for centuries with such things as sumptuary laws. If the young and poor can look good in new and fashionable clothes then what’s to stop them being mistaken for nice upper middle class folks like those complaining? Sumptuary laws never did work and they’re not going to now either. At least in my estimation they’re not.
So, I tend to think that the social background to the business is sound.
The actual business itself, well, that’s subject to all the usual caveats of course and we can look at the accounts here.
This is not, though, about those accounts. It’s about a short term drop in the share price as a result of press interest. Sure, expecting recovery does mean assuming that the base and underlying business is sound but then I think that is true.
Four months back
We had something similar four months back. Then it was the announcement that certain factories perhaps two or four levels down in the supply chain had been paying people under the national minimum wage. This is not, directly, boohoo’s problem but it could be a reputational one. As I said at the time:
However as a legal responsibility the impact here is going to be trivial. A likely lad walking in off the street and working – illegally – for less than minimum wage without a work permit is not going to make the legal heavens fall in upon Boohoo. It won’t even impact all that much on the subcontractor in fact. This is simply not the same as the sort of compulsion the Act is against.
Thus the danger is the reputational damage – what does the customer base think about all of this. And to be honest I don’t think the people who buy £5 jeans worry overmuch about such things. After all, companies like Primark are equally popular and they’re buying in stuff from Bangladeshi factories paying £80 a month to the staff – yes, I have been there, have direct experience of it all.
So, as of July 13th I recommended buying at 230.00 (that’s two pounds thirty, £2.30 GBP) as I thought this would all blow over.
As it happens it did and on 29 September I said take the profits at 390.00 (£3.90 GBP).
My real point here though is that last time I looked at boohoo it was a strong buy. Now? I don’t know. So, take the profit you made at least.
Now it’s all happening again. Or at least that is my case for another go around at this speculation.
The current news
(boohoo stock price from London Stock Exchange)
As we can see there’s been something or other that has damaged that share price since that 29 September call to sell. It’s the big drop in the past couple of days that is the point here:
The National Crime Agency (NCA) is investigating companies that supply the fast-fashion giant Boohoo on suspicion of money laundering and VAT fraud.
That’s one of the two stories at issue. And it’s entirely a nothing burger. Wholly:
Leicester clothing factories with links to Boohoo and Select Fashion have been involved in a “multi-million pound” money laundering and VAT fraud scandal, an investigation has found.
Firms based in the city’s garment manufacturing district, some of which were suppliers to the fast fashion retailers, were revealed to have been involved in fraudulent activity relating to fake invoices and shell companies.
The finding is that some of the people who sometimes supplied boohoo were faking invoices, dealing in cash and stealing VAT payments. This isn’t even to do with making supplies to boohoo, this is just a general finding of tax fiddles among that wider diaspora of the supply base. Again, without even the allegation that this is to do with actual supplies to boohoo.
The money laundering part is not actually an allegation of managing cash flows for drugs dealers and the like, rather than the definition of money laundering has become so wide these days that tax fiddles in cash are now money laundering.
This really is nothing to do with boohoo even as it makes certain investors nervous. We should take advantage of their fear.
The other bit
This is potentially a bit more serious.
Boohoo Group Plc shares fell the most since August after the U.K. fast-fashion retailer caught up in a labor scandal said it’s seeking a new auditor to replace PricewaterhouseCoopers.
As far as we know the major accounting firms don’t want the work either.
Here I tend to think this is not important but note that “tend” there. This is reputation management by those large firms. I do not think there’s some large hole in the boohoo accounts. They’re not a complicated enough company for there to be such holes to be honest. They’re not dealing – not massively at least – in offshore havens, their cashflow inwards is terribly easy to check given that it’s all online sales.
It’s that connection to the local, UK, rag trade that’s putting the accountants off. I expect this to get sorted by one of the second ranking – but still large enough to manage the business – auditors to take on the work.
This isn’t about the underlying fundamentals of boohoo which haven’t changed since those two earlier pieces linked above. Rather, it’s trading these newspaper stories. High flying stocks, those that are priced for continued growth and success, are prey to falls if that reporting turns negative. But such falls only last until that underlying growth shines through again. In other words, this too shall pass.
The investor view
Buy into boohoo again and ride the correction. Stories of VAT shenanigans, cash payments against fake invoices, in the supply chain, these simply don’t affect boohoo in any material manner. The price drop is overdone.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.