Boohoo profits drop as return rates soar and COVID costs hit

Online fashion giant Boohoo Group has revealed that profits slumped and costs soared as it struggled to get to grips with difficulties caused by the pandemic.

Leaders at the fashion group said pre-tax profits for the 12 months to the end of February plunged to £7.8 million from £124.7 million a year earlier as distribution costs rose and customer demand fell.

They also warned that Boohoo expects high costs to persist throughout the rest of this year but have a series of cost-cutting initiatives in place to manage the business. Despite the cost-cutting, prices for products could also rise, with the company only committing to “mitigate where possible before passing prices on to consumers”.

Sales were up 14% on the year to £2 billion and remain well above pre-pandemic levels, as high streets closed and shoppers turned to online.

Boohoo Group, which owns brands including Boohoo, Burton, Debenhams, Warehouse and Karen Millen, revealed that since the easing of restrictions, customers have flocked back to physical stores but those using its services have increased the number of garments being returned.

Return rates are a key metric for online fashion retailers and there had been a significant reduction during the pandemic. But, with restrictions easing, customers have started going out more and return rates have increased to above the level seen before the pandemic.

Boohoo also revealed that return rates have been so high in the past three months that this has led to sales falling compared with a year ago.

The rising costs of deliveries for the company – including a reduction in airfreight capacity and higher shipping prices – along with lower-than-anticipated growth contributed to a £60 million hit to profits, it added.

John Lyttle, Group CEO, commented: “Over the past two years, we have significantly increased market share in our core geographies of the UK and the US, and we have grown active customer numbers by 43% across the group to 20 million. Our focus over the past two years has been on investing to build a strong platform, with the right infrastructure, supported by increased capacity to better serve our customers.

“In the year ahead we are focussed on optimising our operations through increasing flexibility within our supply chain, landing key efficiency projects and progressing strategic initiatives such as wholesale and our US distribution centre. This will ensure that the group is well-positioned to rebound strongly as pandemic-related headwinds ease.”

Analyst Julie Palmer, partner at Begbies Traynor, said: “The outlook isn’t pretty, with inflation a real concern for this outfit, and falling consumer confidence may mean customers thinking twice before refreshing their wardrobes as we head into summer.”

Harry Barnick, Senior Analyst at Third Bridge, added: “Our experts say the Boohoo bubble has burst - with market growth expected to soften and costs rising across the world, both sales and profitability are at risk.

“Boohoo's customers are faced with an unprecedented rise in the cost of living and seem set to cut back on fast fashion spending as a result. Shein's growth has compounded Boohoo's problems, as the Chinese competitor is taking share of wallet from the British fast fashion customer.

“Freight and container costs remain high and gross margins erosion is an unwelcome byproduct of this challenge. ESG factors are front of mind for investors and customers alike. Boohoo's fast fashion model and poor track record of production are a key risk in this context.”