By Geoffrey Smith
Investing.com -- Boohoo 's (LON:BOOH) past is catching up with it, again.
The U.K.-based fast fashion chain saw its stock fall over 7% at one point on Tuesday after Sky News reported that the company faces a possible import ban into the U.S. over past allegations of using slave labor in its supply chain.
The NGO Liberty Shared, which campaigns against perceived corporate abuses, has presented two petitions to U.S. authorities in the last month to start investigating allegations of illegally low pay and other abuses at a string of factories in Leicester, England. The city is home to the U.K.’s biggest concentration of people originating from the Indian subcontinent, some 10,000 of whom work in mostly precarious conditions in the textile industry.
An import ban from the U.S. would be a severe blow to the company, which has invested heavily in growing its presence there after the acquisition of the Nasty Gal and Pretty Little Thing brands. The U.S. accounted for over 20% of global revenue last year and that share is rising. Such diversification away from the U.K. market has been one of the main factors behind the share’s performance, helping it through a period when U.K.-focused stocks carried a hefty Brexit-related discount.
The shares recovered later in the morning after the company issued a statement playing down the risk of U.S. action against it. By 5:30 AM ET (1030 GMT), they were down 4.3%, just off a new low for the year.
Reuters quoted Boohoo as saying that it hasn’t been notified of any investigation into it by the Customs and Border Protection Service, which is responsible for ensuring that products made with slave labor don’t enter the U.S.
“Auditors and investigators who are forensically examining suppliers in Leicester have found no evidence of modern day slavery,” Reuters quoted Boohoo as saying, adding that Boohoo said it hasn’t been notified of any investigation by the CBP.
“We are confident in the actions that we are taking to ensure that all of the group’s products meet and exceed the CBP criteria on preventing the product of forced labour entering the U.S.,” it said.
The latest development comes only a few weeks after the company claimed to be making good progress in implementing the recommendations of a review into its practices by a senior lawyer, Alison Levitt. Levitt had absolved the company of knowingly using slave labor in the past but had called it slow to address concerns that had been brought to its attention.
It has hired a former judge, Brian Leveson, to check its implementation of the policies recommended in Levitt’s review.
The petitions from Liberty Shared nonetheless ensure that Boohoo has a unique governance problem that rivals appear to have avoided. The shine has gone off its shares in the last year, despite its online-only distribution model being better suited to the pandemic than Next. It’s up barely 10% over the last 12 months, while Asos stock is up 91% and Next stock is up over 22%.
An unequivocal OK from the CBP could conceivably trigger a rerating, but as long as this issue remains unresolved, it’s hard to see that recent underperformance changing - however many teenagers want to anticipate the end of lockdown by splashing out on some new party outfits.