(Bloomberg) — Boohoo Group Plc ignored warnings about significant labor violations at U.K. garment suppliers, according to an independent review that cleared the fashion retailer of direct involvement in any abuses.
Shares in Boohoo rose as much as 21% Friday, partially recovering from a stock slump that began in June. Investors focused on the report’s conclusion that Boohoo didn’t deliberately allow the conditions for workers to be underpaid and that its business model isn’t based on exploitation.
In the review, Alison Levitt, a lawyer and former U.K. public prosecutor, found evidence of suppliers paying less than minimum wage and skimping on safety precautions in Leicester amid a flareup of Covid-19. She said there was no evidence Boohoo was directly involved, however. The company pledged to fight problems at suppliers by improving its auditing.
How much of a reputational hit Boohoo has taken remains unclear. While there have been social-media calls to boycott its low-cost fashion sites, the company has been one the world’s fastest-growing fashion retailers, and its stock has risen almost 12-fold over the past five years. The shares lost part of their early gains Friday, trading up 9.7% at 11:41 a.m. in London.
“Growth and profit were prioritized to the extent that the company lost sight of other issues,” Levitt wrote in the report. “There were a series of warnings and red flags, both from inside and outside the company, which Boohoo ignored. By the time they began to take notice, it was too late.”
The company previously said that since 2016, it has been carrying out regular unscheduled inspections among suppliers in Leicester. Since then a number of investigations published in U.K. newspapers have alleged continuing violations of labor guidelines.
The report said that generally inspection visits were announced ahead of time, and it concluded that problems were “endemic.”
“Much of the time, Boohoo has simply no idea where its clothes are being made and thus has no chance of monitoring the conditions of the workers who make them,” Levitt wrote. “If Boohoo is not prepared to take a long hard look at itself then the long-term prospects are bleak.”
Analysts applauded that Boohoo made the full report public and Andrew Wade of Jefferies said that Levitt’s recommendations for improvement show that Boohoo’s business model isn’t dependent on exploitation.
Boohoo has been accused of encouraging suppliers in Leicester to undercut each other on pricing, which critics said meant factories then cut corners on employee wages. Boohoo is by far the biggest user of factories in that city. Other rivals including Next Plc and Primark do not work in Leicester anymore.
Senior directors at the company knew since December there were “very serious issues” about how Leicester factory workers were being treated, and the company’s remedies were insufficient, Levitt said.
The report gave an example of how Boohoo’s Nasty Gal brand placed an order in the middle of the lockdown for jogging bottoms with Revolution, a designer in Manchester that had no manufacturing capacity.
“Who then did Nasty Gal think was going to make them?” Levitt wrote. “I have concluded that the truth is that they did not know and did not really care.”
She said that as the review progressed, management became less responsive to her queries. The company had the approach that every piece of negative publicity should be treated like an isolated incident, and unless there was a “smoking gun,” allegations should be considered unproven, she said.
Investors will find out next week how sales have progressed in the most recent quarter, when a series of media reports came out about the alleged labor abuses.
Boohoo will probably also face higher costs as it takes measures to improve its sourcing, wrote Clive Black, an analyst at Shore Capital.
Boohoo is “not yet out of the woods,” he wrote. More clarity on wider investigations by U.K. authorities are necessary before giving the company a “clean bill of health.”
Levitt recommended that Boohoo strengthen its sourcing teams and purchasing practices and impose mandatory education and training for its buyers so they better understand the supply chain. There will be disciplinary procedures for any buyers who place orders with unauthorized suppliers.
Boohoo, which had refused to publish the names of its suppliers, saying that’s commercially sensitive information, has now committed to listing the factories it works with every year. It will also invite new suppliers “who have a track record of ethical and sustainability practices.”
The review also said that the board had struggled in the past to stand up to Mahmud Kamani, Boohoo’s co-founder, chairman and largest shareholder.
Chief Executive Officer John Lyttle said he is the key decision-maker in the business.
“I told Ms. Levitt very clearly that if a decision has to be made then it will be my decision that will stand,” he said in an interview.
Boohoo is also appointing more independent non-executives to bolster the board.
Levitt’s proposed changes won’t impact the speed of sourcing, Lyttle said earlier on a call with analysts. That’s considered to be one of Boohoo’s key commercial advantages over rivals. Lyttle also maintained the company’s financial guidance.
“The pace of that growth has been fast, and processes have not kept up with that,” said Lyttle, who has been CEO since March 2019.
(Updates shares in fourth paragraph)
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