Just a year ago, things were looking up for online fast fashion retailer Boohoo, which operates as a sort of laptop Primark. Its share price had climbed quickly to about £4 billion (€4.7 billion), which meant its Offaly chief executive, John Lyttle, was on course for a major payday – a £50 million (€58.7 million) bonus by 2024 that would be the biggest incentive awarded to an Irish corporate executive.
But now it seems as if Lyttle’s big Boohoo bonus dream could end in tears. The company’s highwire business model appears to be caught in the danger zone between, on one side, the effects of rampant inflation and, on the other, the inescapable realities of the climate change agenda. Lyttle is running out of time to turn around the company’s fortunes.
It isn’t really his fault – it is just corporate gravity taking effect. The company’s entire model is based around low prices and wafer-thin costs. Yet costs are sky rocketing, particularly for businesses dependent upon logistics networks for cheap deliveries to factories, warehouses and consumers. Taxes on the carbon-belching fuels that are the biggest cost in logistics networks also are only going one way. Fast fashion is in for an inevitable slowdown.
Lyttle jumped ship in March 2019 from his job as chief operating officer of Irish-run Primark, which operates here as Penneys, to replace co-founder Carol Kane at the helm of Boohoo. It owns youth-focused online retail stores such as Pretty Little Thing and Nasty Gal. It has also bought up dying high street brands, such as Debenhams and Karen Millen, aiming to sprinkle them with digital stardust.
Kane and Boohoo's other co-founder, Mahmud Kamani, and the rest of the board dangled the most enormous of carrots in front of Lyttle. If he could grow the share price by 180 per cent in five years, he would pick up a £50 million bonus in June 2024. Boohoo's market value when he came onboard was just over £2 billion, meaning he had to preside over a rise to about £5.6 billion.
The pandemic that kicked off almost exactly a year into his tenure initially seemed to be a wind at Lyttle’s back. Online retailing was the only game in town during long periods of lockdown, when Boohoo’s youthful customer base was unable to buy from some of its bricks and mortar rivals, such as Primark. Through acquisitions and organic growth, its valuation had doubled to £4 billion by last May.
Lyttle would have been forgiven if he already had the bonus cash spent in his head. All he had to do was grow the share price by another 40 per cent or so over the following three years, and he was over the line. Forty per cent in three years is a high bar under normal conditions, but given the breakneck speeds at which Boohoo had been growing since the pandemic kicked in, it looked pedestrian.
Almost nothing has gone right for Boohoo and Lyttle since it hit that high watermark. It warned investors this week of sharply slowing growth rates, the fourth time in a year it has issued a similar warning. Its market valuation is now below £1 billion, meaning Lyttle has to increase it by more than 450 per cent in two years to pocket his full bonus.
For Lyttle to achieve even the minimum payout under the bonus scheme, the share price must still triple. Barring a miraculous recovery in its US operation, where it is struggling with long delivery times and stiff competition, Lyttle looks set to lose out. Kane and Kamani, meanwhile, will lose out even more – Boohoo’s valuation must top £7.5 billion by next summer for them to share £150 million.
While the pandemic initially turbo-boosted Boohoo’s sales, the secondary economic effects of the virus have upended supply chains and led to a spike in shipping costs. Boohoo has warned shareholders of an extra £22 million annual hit to its cost base when shipping stock and materials, and a further £38 million hit on the costs of shipping goods to customers.
That has turned the economics of online fast fashion upside down. Lyttle’s alma mater, Primark, has been questioned by investors in recent years over its insistence on standing on the sidelines of the e-commerce revolution. But that may yet turn out to be a good move, until someone can figure out a way to make it sustainably economic to ship €10 dresses or jeans to consumers’ doors.
Primark is also feeling the heat of cost rises. It is estimated that it may have to raise prices in its stores by up to 10 per cent this year. Lyttle has, so far, resisted the temptation to pass on the burden of the turmoil in its cost base in the form of price increases for Boohoo’s young, cost-conscious customers.
That’s the thing about fast fashion: its customers make snap decisions. If you’re on entry level wages and the price of a cheap garment rises by even a few euro, it is easier to just wear the other one you bought only last month.
The current level of inflation in the supply chain may end up being only temporary, but it will hang around long enough to block Lyttle from reaching his bonus targets. But he isn’t admitting defeat just yet, stating this week that he is “confident about getting our share price back up”.
Lyttle’s plan is to build a huge warehouse facility in Pennsylvania to handle its US sales, instead of shipping them from the UK. That would cut costs and slash delivery times, which could help it to fend off competition from other retailers, such as Shein. He also believes that automating its factories will pare back costs enough to maintain its low prices without killing margins.
Even if that plan succeeds, Boohoo eventually may run up against a wall if consumer attitudes towards fast fashion harden because of perceptions around waste and climate change – even its Generation Z customer base have been around long enough to know deep down that buying throwaway items of clothing is bad for the planet.
No matter what values they profess, consumers are instinctively selfish and there is no guarantee that they will stop shopping with companies that have questionable environmental credentials, if it saves them cash. But it isn’t just the attitudes of consumers that fast fashion retailers must worry about. Institutional investors will come under pressure in coming years to direct capital towards greener companies. For businesses such as Boohoo and even Primark, that will present a raft of fresh challenges.