Another Attack On Boohoo - Buy If It Works
Summary
- There are allegations that boohoo is using modern slave labour to produce its garments and that this has been reported to US Customs.
- There are rumours that this might lead to import bans - something most unlikely to happen.
- If the stock weakens substantially further, then it'll be time to buy again.
The basic background
boohoo (OTC:BHHOF) (OTCPK:BHOOY) (they prefer it without the capital) is an online retailer of fast fashion. Largely in the UK they're expanding into the US and other markets. They're very successful.
I don't intend to talk about the detailed financials at all. This is a special situation based upon the news cycle and claims being made about modern slavery within the supply chain, that's all it's about too. We've ridden - or at least my advice has suggested - riding this news cycle twice before. This is about, maybe, riding it again.
(boohoo share price from London Stock Exchange)
The business model
Fast fashion means being able to make clothing cheap. But also, obviously, being able to make it swiftly. It's that second which is changing the supply chain.
Most low end - in price that is - clothing is made out in the Far East. Used to be largely China and in the past couple of decades the business has boomed in Bangladesh. I've not just been out there I know a couple of the major owners of garment factories. I grasp the business model. One part of which is that the business has long lead times.
It might take 6 months or even more to gain a specific shipment, from ordering to arrival here in Europe (which most of boohoo's business still is). This is partly just transport distances and times but mostly that's just how the business is set up. Designs are made, manufacturing slots booked, several clothing seasons ahead.
This rather leaves out the "fast" part of fast fashion. It was Inditex (owner of Zara and other brands) which really trialled a change to this system. Instead of that long lead-time supply chain they started to mix and match. Order substantial amounts from the Far East, yes. But then, if there was a specific style which was a hit, top up that supply from European factories. The North of Portugal and parts of Galicia thus still have textile and garment factories feeding into that system.
boohoo has taken this the logical step further. Some goodly part of their appeal as a commercial offering is that a design is seen on TV (could be anything, "Love Island" say, just as an example) and that's available on the website in a day or three. While the design is still be talked about that is - that's the sales pull on offer. This means that manufacturing must be local. To feed the UK, it must be in the UK that is.
Much of that manufacturing is done in Leicester.
The Leicester problem
Being in a First World country doing fast fashion manufacturing comes with certain problems the most obvious of which is labour costs. Which is where the investment opportunity for us comes in.
Back in July last year the Sunday Times ran an investigation stating that some factories were paying below UK minimum wage. This wasn't quite the appallingness some seemed to think, it was subcontractors three and five levels down the supply chain that the accusation was being made about. But the price of boohoo stock dropped substantially as a result.
I then recommended buying because the effect upon the business numbers would be much smaller - possibly nothing - than the stock price was indicating. This was correct and in late September I said take the profit. Not because there wasn't a good case for the company at those levels but just because the special situation was over.
As it happened the accusations of dodginess in the supply chain arose in mid-October again and as a result I said buy again.
If you look up at that price chart the two buy advices hit the respective bottoms and the one sell advice hit the interim price peak. None of which was based upon the detailed numbers of boohoo's underlying performance. Rather, on the entirely tactical point that the allegations about the supply chain were entirely overdone and so too the price movements in relation to them.
Which is where we are today with boohoo
We have another allegation about that supply chain. It's not even a new allegation in fact, it's the same old one just made in a different place:
The booming online fashion empire Boohoo and many of its suppliers are facing the possibility of a United States import ban because of widespread allegations over the use of slave labour.
US Customs and Border Protection has seen enough evidence to launch an investigation after petitions from a campaigning British lawyer.
The claim then goes on that since the US is 20% of sales then this is a significant downside to the company. And thus, presumably, to the stock price.
There are a number of reasons why this doesn't work. The first and most obvious being that the allegation in the UK is that less than minimum wage was being paid in some part of the supply chain. Leave aside whether it's true or not that's not enough to trigger US Customs into banning imports. Because the ban is justified by slavery, coercion or indenture. All three of which are considerably more serious than less than minimum wage being paid.
That is, even if the allegations are true a ban is most, most, unlikely.
But it's the second reason that's the killer here. Why is boohoo manufacturing in the UK? Because it's willing to suffer First World labour costs in order to be close to market and have short delivery times. Well, if you want to be close to market with short delivery times then why are you going to manufacture in the UK for your US sales? Quite, you're not, are you?
Even if you were to start talking about air freight to make the timings add up then you'd just start air freighting out of the Far East anyway.
The claim doesn't, therefore, work
The claim that boohoo faces some sort of US Customs ban doesn't therefore work. Partly because the claim itself doesn't rise to the standard that would cause a ban, mostly because the very cause of the complaint - local manufacturing - means that a ban wouldn't have that much effect.
But then the last two claims of naughtiness in that supply chain didn't really work either. Yet the stock price dropped - to our profit - both times. The question now is, well, will it drop again?
Currently the price - as I write at least - has fallen a few pence and if that ends up as being all the effect there is then there's nothing much for us here. Not on this specific and technical basis there isn't. However, if the stock drops in any substantial manner over the next few days - assuming that the fall would be about this story - then there is something here for us.
At this very moment this sentence goes into pixels the price is down 17 pence. I'd expect it to recover that over time but that's not exciting enough for it to be a speculation for us. However, if that price drops £2 as it did first time, or £1.50 as it did the second, then we should be very interested in a bull position.
My estimation, and it's only an estimation, is that if this story takes more than 60 or 70 pence - so, about 20% or so - off the price then we should buy in order to ride the correction.
My view
We've had two significant falls in the boohoo price over this past year. Both times the stock has recovered entirely. The falls have been over stories of impropriety in the supply chain. My read is and has been that certain investors vastly over-estimate the effect such stories have on the actual consumers of the goods. The kids don't, in fact, care.
Here it's slightly different in that there's a claim that US Customs will - might - ban imports. The complaints about less than minimum wage being paid aren't modern slavery and don't meet the requirements for an import ban. Further, given local production as the core part of the business method even a ban wouldn't have much effect.
So, significant weakness in the price following this story is something to take advantage of.
The investor view
If the stock weakens appreciably as a result of this story - as it did for the last two iterations of the same story - then that's a buying opportunity. On the purely tactical basis that the stock will recover as it has done twice before.
This is a speculation, not a long-term endorsement of boohoo, their model or their prospects. As twice before, it's simply a reaction to those reports of supply chain problems and stock price moves that result.
This article was written by
Analyst’s 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.
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