Extra costs in multiple areas of the business present a headwind for fast-fashion retailer Boohoo (BOO:AIM).

First-half results on 30 September failed to excite the market as better than expected sales growth was overshadowed by guidance for lots of extra spending.

Customers returning fewer clothes helped boost the gross margin but Boohoo is now guiding for return rates to drift back to historic levels. Delivery costs have become more expensive for overseas markets and marketing spend is going up. The retailer will spend more on improving operations and IT.

There are also extra costs relating to actions from the recent review of its supply chain. Boohoo has pledged to improve its governance and be more focused on supply chain compliance, all of which will cost time and money.

These costs will either have to be passed onto shoppers via higher prices or absorbed by Boohoo, potentially to the detriment of its margins.

A key appeal of Boohoo is its relatively low prices so the management team is going to have to weigh up whether the retailer can absorb extra costs to avoid alienating customers or push up prices, which could cause demand to fall.

Shore Capital reiterated its ‘sell’ rating on Boohoo, despite the current momentum, seeing potential pressure on gross margins and rising central costs following the company’s admission that it needs to change its approach to the Leicester textile industry. It added: ‘We look for further clarity on potential wider investigations by other authorities before giving the company a clean bill of health.’

Upon publication of its supply review on 25 September, investors were relieved as the probe concluded Boohoo did not deliberately allow poor conditions and low pay to exist within its supply chain.

While the report identified ‘significant and clearly unacceptable issues’ in the supply chain, it stated that the company had already taken the steps to remedy problems identified in Leicester nearly a year ago.

Boohoo said it pledged to implement recommended improvements outlined in the review and stressed the costs of improved oversight and governance should not affect financial forecasts, although the share price rally was anything but an exoneration of Boohoo.

Alison Levitt QC’s damning report uncovered excessive hours, life-threatening conditions and illegally low pay across much of its supply chain.

No-one on the Boohoo board, where co-founder, executive chairman and 12.5% shareholder Mahmud Kamani holds sway, has resigned. That is surprising since the report confirmed that a company heavily dependent on a raft of dirt-cheap suppliers for its business model didn’t run a proper supplier-monitoring department, proving that Boohoo has questionable ESG qualities and has work to do to make amends.

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