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Boohoo shares slide as it warns on profit margins

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An illustration with a mobile phone and laptop shows the logo and website of online fashion group Boohoo on August 12, 2021. (Photo by JUSTIN TALLIS / AFP) (Photo by JUSTIN TALLIS/AFP via Getty Images)
Sales climbed 20% to £975.9m, but pre-tax profit slumped 64% to £24.6m. (Photo: Getty)

Boohoo (BOO.L) fell out of fashion with investors on Thursday as it warned profit margins would fall short of a previous forecast for the year.

The online retailer, which has faced scrutiny in recent years because of working conditions in its supply chain, blamed a combination of heavy investment and rising costs on the hindered performance.

Shipping costs in particular were £26m ($35m) higher than pre-pandemic levels, and margins were being squeezed by wage inflation in its distribution centres.

New rules after Britain left the European Union also reduced profit margins from 57.8% to 53.6%, thanks to extra checks required at customs.

Sales in the six months to the end of August climbed 20% to £975.9m, as an online shopping boom fuelled by the coronavirus pandemic continued, but pre-tax profit slumped 64% to £24.6m.

Watch: What is inflation and why is it important?

It expects pre-tax earnings to be slightly lower for the full-year, between 9% and 9.5% instead of the 9.5% to 10% range it had previously forecast.

Total spending on infrastructure is also now expected to be around £275m this year, compared with previous estimates of £250m.

Shares in London fell 10% on the back of the news.

However, it did manage to double its market share in both the UK and US since the start of the coronavirus pandemic, even as shoppers returned to the high street as lockdown restrictions eased. Sales In Europe also fell 15% year-on-year.

Boohoo shares fell as much as 10% on the day. Chart: Yahoo Finance
Boohoo shares fell as much as 10% on the day. Chart: Yahoo Finance

The fashion retailer said it was “confident” in its performance for the rest of the year, after heavy investment in marketing and integrating new brands.

The company launched its new Debenhams digital department store in April, whose lines include fashion, beauty and homewares. Boohoo purchased Debenhams’ brand and website for £55m in January after the company crashed into administration, causing around 12,000 job losses.

It also integrated former Arcadia brands Dorothy Perkins, Burton and Wallis during the period, as well as moving two warehouses in Wellingborough and Daventry.

Read more: UK economic rebound from pandemic stronger than expected

“We are delighted to have doubled our market share in key markets such as the UK and US, have significantly expanded our target addressable market through selective acquisitions and are excited about the global potential for all of our brands,” chief executive John Lyttle said.

Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said: “This is not Boohoo’s best look. Sales momentum has sorely disappointed the market, with a lack of demand relating to holidays and festivals hurting the important UK market. The fast-fashion giant is also being held back by enormous extra costs in its supply chains.

“Higher wages for its workers, plus the well-publicised freight and shipping disruption are all affecting profitability. These headwinds aren’t going to disappear overnight, so it’s crucial that sales get moving at a better pace.”

Watch: UK economy's coronavirus collapse no longer measured as worst in 300 years

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