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08 Jul 2020 | 10:07

Shore Capital says sell Boohoo on supply-chain issues

(Sharecast News) - Shore Capital downgraded Boohoo to 'sell' and said the company's share price did not reflect the risks created by allegations of mistreatment of workers in its supply chain. Boohoo announced an independent review of its supply chain on Wednesday and said it had cut ties to two factories that breached its code of conduct. It said it found no evidence of workers being paid less than half the UK minimum wage, as alleged in a press report.

Boohoo has also begun recruiting two new non-executive directors and pledged to spend £10m to clean up supply chains in Leicester, where the allegations are based.

"All these measures look sensible at first glance, but the genie is already out of the bottle and the company will need to be more transparent on sustainability and sourcing issues," Shore analysts Greg Lawless and Clive Black said in a note to clients.

Shore, a broker to Boohoo, said the company's share price implied no economic impact from the supplier issues in Leicester. Lawless and Black listed potential customer boycotts, higher manufacturing costs and increased operating costs to demonstrate compliance as possible effects.

Shore's target price for Boohoo shares is 261p. AT 10:48 BST the shares were down 13.7% to 225.5p.

Boohoo's shares have fallen by more than a third since the weekend when a press report alleged workers in a factory in its supply chain were paid just £3.50 an hour and forced to work during the Covid-19 lockdown without protective equipment. Next, Asos and other wholesale customers have dropped Boohoo products as a result.

The company may be subject to external inquiries, including a possible police investigation, making the outcome of the matter hard to judge, the Shore analysts said. Boohoo shares may also be off limits for ethical funds, they added.

The matter may be cleared up relatively quickly but it could also be a "Gerald Ratner moment", Lawless and Black said, referring to the near-collapse of Ratners the jeweller when its boss mocked the quality of its products in public.

"With a premium rating and major issues around brand equity, trading and financial fall-out, we think it wise to move to sell," the analysts said. "We will revisit when we feel the fallout has settled and we have further clarity on the economic and reputation consequences."

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