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Boohoo profits get hit by increasing returns and costs linked to COVID

Boohoo profits get hit by increasing returns and costs linked to COVID

With sales up 14% to £2 billion, to some people, it would appear that Boohoo is riding the wave of the shift to online shopping. These figures are far above levels seen prior to the pandemic but they hide the truth about the performance of the business.

In the 12 months leading up to the end of February, pre-tax profits dropped from a healthy £124.7m to £7.8m. This incredible drop has been linked to a drop in customer demand, rising distribution costs and the general cost impact of COVID.

Will these patterns continue?

Boohoo has warned that they expect continued high costs for at least the rest of 2022, in line with rising costs across almost every industry. However, they are attempting to implement some cost-cutting measures throughout the business.

The reality is that whilst this will reduce some of the impacts on rising costs, we are still likely to see customers having to pay higher prices for Boohoo clothing. Will this mean customers start to look elsewhere? In an already highly competitive industry, more likely is that all businesses will have to raise prices at some point so they may not lose as many customers as feared.

How have returns impacted the results?

We have all taken advantage of free returns when shopping online, particularly when you can take them back to a physical store or parcel collection point. It should be noted that during the pandemic return rates reduced but since restrictions have been eased this has rocketed.

To put this into perspective, in the past three months Boohoo has announced that return rates are at such a level that it has meant sales fell compared to one year ago. As a result, we must consider how significant the distribution costs are for these returns policies to be implemented.

Boohoo believes that as a result of freight capacity with airlines dropping, shipping prices going up and slower growth, this has combined to reduce profits by as much as £60 million.

What do the analysts say?

Industry analysts don’t paint a particularly pretty picture for Boohoo and other fast fashion retailers!

With inflation increasing and consumers focusing more on the cost of living, fast fashion is going to be one of the first areas to cut back on. Throw in the fact that the Chinese fashion giant Shein is quickly securing market share from established players like Boohoo.

Add in the high freight costs and reduced profit margins, and then Boohoo’s model for fast fashion is at risk.

So what is next?

The simple answer is we expect more bad news and more challenges for both retailers and consumers. With Missguided recently entering administration, is this a sign of things to come or will the likes to Boohoo be able to ride the current cost of living storm?

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