John LyttleREFINERY29 toasts Primark's US debut, And&And, New York, America - 02 Sep 2015

LONDON — Despite cutting ties with two of its suppliers and announcing an independent review of its entire supply chain, the embattled Boohoo Group has failed to stop its share price from plummeting on reports of abysmal working conditions and pay on its factory floors in Leicester, England.

Shares in Boohoo closed down 14.1 percent to 2.24 pounds on Wednesday despite the swift changes the online retailer has vowed to make. Boohoo’s market value has shrunk by 1 billion pounds following revelations by The Sunday Times of London of illegal employment, substandard pay and dilapidated factory conditions. The share price has almost halved since Friday.

On Wednesday, Boohoo Group said it will launch an immediate, independent review of its supply chain, and has pledged 10 million pounds to eradicate “workplace malpractice.”

The online retail giant said the review will be led by the specialist lawyer Alison Levitt, while there are also plans in place to accelerate a separate, independent third-party supply chain review. That review will be managed by the ethical audit and compliance specialists Verisio and Bureau Veritas.

In addition, Boohoo said it will invest an incremental 10 million pounds to “eradicate supply-chain malpractice.” The group said it would update the markets in September, and again in January, with regard to the review and its other commitments.

“We are deeply shocked by the recent allegations about the Leicester garment industry,” said John Lyttle, Boohoo Group’s chief executive officer. “We wish to reiterate how seriously we are taking these matters, and we will not hesitate to terminate any relationships where noncompliance with our code of conduct is found.”

He said the 10 million pounds it has pledged demonstrates the company’s “resolve to enforce the highest standards of ethics, compliance and transparency for the benefit of all garment workers.”

On July 5, The Sunday Times published the results of an undercover investigation into working conditions at Leicester’s garment factories. Leicester, in the English Midlands, is currently locked down until later this month due to a localized spike in COVID-19 cases.

The Sunday Times reporter, who posed as a student looking for summer work and who instantly secured a job hauling finished clothing at the Jaswal Fashions factory, found that workers were employed illegally, and were being paid less than half of the U.K. minimum wage. The factory was in a dilapidated state, with no social-distancing or hygiene measures in place. Most of Leicester’s garment workers are poor Asian immigrants.

The Boohoo board said it was “shocked and appalled” by the allegations, and would do “everything in our power to rebuild the reputation of the textile manufacturing industry in Leicester. We want to ensure that the actions of a few do not continue to undermine the excellent work of many suppliers in the area, who succeed in providing good jobs and good working conditions.”

Boohoo said it took “extremely seriously all allegations of malpractice, poor working conditions and underpayment of workers. The group will not tolerate any incidence of noncompliance with its code of conduct or any mistreatment of workers, and will not hesitate to terminate relationships with any supplier who does not comply.”

It also said it would welcome the opportunity to work with the British government and the local authorities on any future investigations to help eliminate instances of labor malpractice in Leicester.

Responding to The Sunday Times investigation, Boohoo said it could not find evidence of low pay by its suppliers, and that Jaswal Fashions had never worked for the group. On Wednesday, Boohoo did confirm that its Nasty Gal garments were being repackaged and made ready for delivery by a third party on a premises formerly occupied by Jaswal Fashions in Leicester.

Boohoo also said it found other evidence of noncompliance with its code of conduct. As a result, the group said it has immediately terminated its relationship with two of its suppliers, Revolution Clothing Co. Ltd. and Morefray Ltd.

The company said it would continue to develop its international supply chain and invest in “high-quality U.K. manufacturers. We are therefore confident in our ability to maintain our sustainable business model that can create value for all stakeholders.”

Boohoo, which posted sales of 1.23 billion pounds in fiscal 2019-20, a 44 percent increase on the previous year, has seen its share price on the London Stock Exchange plummet. The Sunday Times’ investigation was published a few days after a separate report about Boohoo’s factories by Labour Behind the Label, a not-for-profit group that advocates for the rights of garment workers in the U.K. and abroad.

On Wednesday morning, Boohoo’s share price was down almost 10 percent to 2.36 pounds.

Speed to market is all-important to Boohoo, which operates direct-to-consumer web sites and owns and develops brands. It produces about 40 percent of its clothing in the U.K., and famously works on a test-and-repeat model. The company launches a few units of many new styles each week, and then immediately ramps up production of the most successful ones.

Boohoo has been a retail winner during lockdown, growing sales, raising cash for its balance sheet and buying the online businesses of struggling retail rivals, most recently Warehouse and Oasis. Its brands include PrettyLittleThing, Miss Pap, Nasty Gal, Coast and Karen Millen.

The British media highlighted decisions by online retailers such as Amazon, Next, Asos and Zalando to drop Boohoo products from their sites, but those moves mean little. The bulk of Boohoo’s business is direct-to-consumer via its own sites. Wholesale is tiny, and accounted for 1.4 percent of sales in the first four months of the year, according to Boohoo.

Other investors are backing the company: On Wednesday, Jupiter Fund Management confirmed in a filing that it now has a total of 10.32 percent of the voting rights in Boohoo, compared to 9.82 percent.

Bernstein Research is already looking to Boohoo’s future: It said it expects the online retailer to switch more of its manufacturing to Southern Europe in order to preserve margins, as U.K. supply costs remain high.

It said  producing in southern Europe will add only one day of lead time, and at a lower cost, including air freight.

“We expect a small percent of Leicester production to stay local, focusing on the highest-margin, shortest lead-time orders [reorders of fast-selling items] where saving one day of lead time is critical,” Bernstein said in a report on Wednesday.