By Lina Saigol
Shares in Boohoo soared almost 17% on Friday, after an independent review into allegations about working conditions and low pay found “many failings” in the fashion retailer’s Leicester supply chain.
But the investigation found that Boohoo has shown it is taking steps to remedy the problem.
Boohoo /zigman2/quotes/205655689/delayed UK:BOO +1.61% , which owns brands including Pretty Little Thing and Nasty Gal, commissioned the review in July, led by top lawyer Alison Levitt QC, following a report in the Sunday Times .
The newspaper alleged that workers in a factory in Leicester, central England, which sells clothes for Boohoo, were being paid as little as £3.50 an hour. The minimum wage for those aged 25 and over in the U.K. is £8.72 .
“Ms Levitt is satisfied that Boohoo did not deliberately allow poor conditions and low pay to exist within its supply chain, it did not intentionally profit from them and its business model is not founded on exploiting workers in Leicester,” Boohoo said in a statement .
Shares in Boohoo rose almost 17% in early morning trading in London, before paring those gains to trade at 9.66%.
Several online retailers dropped the sale of Boohoo products from their websites following the publication of the Sunday Times report, including Amazon /zigman2/quotes/210331248/composite AMZN -5.45% , which was holding stock from the fashion retailer and its associated brands as a result of historic agreements.
British clothing retailer Next /zigman2/quotes/200704121/delayed UK:NXT -2.18% also removed all Boohoo and Pretty Little Thing items that it was previously selling from all of its websites, while Berlin-based online fashion store Zalando /zigman2/quotes/203377673/delayed XE:ZAL -2.46% delisted all products by Boohoo and subsidiaries, and paused all new business with the company.
“The findings and recommendations of the Independent Review are clear,” said Boohoo Chief Executive John Lyttle.
“The Group recognizes that in order to effect real change in the Leicester textile industry, further clear, strong, and measurable actions are needed in addition to those that the Group was undertaking,” he added.
The review stated that “if Boohoo is willing to take a different approach to how it both views and interacts with the Leicester supply chain, it has within its power to be a tremendous force for good.”
It recommended a series of improvements to Boohoo’s corporate governance, compliance and monitoring processes.
In response, Boohoo outlined six steps to improve governance, including appointing new independent directors to its board, making supply-chain compliance a mandatory item on every board meeting agenda, and creating an additional board committee to allow it to better identify and monitor the risks it faces as a business.
The company said it would also ensure supply-chain compliance in relation to COVID-19 .
AJ Bell investment director Russ Mould said Boohoo’s change in its processes could result in higher costs, which may ultimately be passed on to customers.
“A key appeal of Boohoo is its relatively low prices, so management are going to have to weigh up whether the company will stomach some of the extra costs to avoid alienating customers or whether it has the magic of pricing power. The latter is where a business has the confidence that it can push up prices without causing demand to fall,” Mould said.
Analysts at Hargreaves Lansdown said Boohoo’s pledges to strengthen its governance should also help Boohoo restore, and crucially, maintain its reputation.
“It’s unclear how the scandal will affect sales but Boohoo’s performance should still be bolstered by its highly adept digital platform and nimble test and repeat manufacturing model,” they said.