Boohoo backlash continues, and FirstGroup flags going concern uncertainty

“The FTSE 100 started off sharply lower before yo-yoing back to near parity in early trading on Wednesday,” says AJ Bell Investment Director Russ Mould.

“The market’s apparent indecision is understandable when you consider it has to balance the ongoing risks from coronavirus with the willingness of governments and central banks to prop up the global economy.

“In the UK there will be focus on Chancellor Rishi Sunak’s mini-Budget, with expectations high after lots of trailers in the media suggesting the announcement will contain blockbuster measures to boost the recovery from lockdown.

“Oil prices were slightly lower, with Brent Crude dropping 0.1% to $43.03. Gold prices continued to shine as they resumed a march towards the $1,800 per ounce mark.”

Boohoo

“The tide is turning for Boohoo. Despite pulling out all the stops, its crisis management efforts aren’t stemming the growing backlash against the company.

“The change in stance towards the retailer is quite remarkable. Only a few weeks ago everyone was applauding Boohoo for its ability to continue growing during the pandemic and investors were bidding up its share price to new record highs.

“Now in the space of days the share price is falling fast, and a growing army of people are sharpening their knives.

“A clear statement from the company in response to allegations of modern slavery shows it is taking the matter very seriously. Unfortunately, the market doesn’t buy it.

“Undertaking a thorough review of its supply chain should have been done a long time ago as allegations about poor supplier working practices date back to 2017.

“Saying it will also look for two non-executive directors with skills in handling ESG issues also suggests it is reacting a little too late.

“Boohoo looks like a classic case study in the making for poor ESG practices given the supplier and wage controversy, its actions in buying companies from connected parties and the very large incentive plans for directors.

“It’s also worth considering that the nature of the fast fashion model and low-price tag mean that many of its customers are buying clothes, wearing them once and chucking them, which is hardly ethical.

“Social media can help build a brand very quickly as influencers show off a company’s products. However, the reverse is also true.

“A social media backlash is now building against Boohoo as the likes of Next and ASOS temporarily stop selling its clothes and reality TV star Vas J Morgan becomes the first influencer and former Boohoo collaborator to boycott the brand.”

FirstGroup

“All sorts of industries have been supported by the state during these unprecedented times but it’s not a good look to be leaning heavily on government help and this may explain the negative response to full year results from transport operator FirstGroup.

“While no formal guidance is given for the current financial year, the message from the company seems to be that it can remain on the rails as long it continues to benefit from the ‘fiscal and contractual’ support which has enabled it to remain cash-positive through lockdown.

“However, depending on how the current crisis plays out, the company faces not just a significant reduction in overall demand but also protracted limitations on capacity enforced by the need to maintain social distancing in a post-coronavirus world.

“In a reasonable worst case scenario, where demand doesn’t begin to recover in the near term and some support is withdrawn, the company flags the risk of breaches to bank covenants. Included in the accounts is the dreaded ‘material uncertainty’ as to its ability to continue as a going concern.

“It’s important to note that just because a firm issues such a warning doesn’t mean it’s about to go out of business.

“FirstGroup might be able to get a new loan or raise cash from its shareholders, while external auditors may not always know everything management are doing to shore up liquidity.

“In addition, the essential nature of the firm’s services should, in theory, see government support maintained.

“Selling the US operations as planned would help, although it will not be an easy task in the current environment.”

These articles are for information purposes only and are not a personal recommendation or advice.