Boohoo hits back at cash flow exaggeration claims

Online fashion house Boohoo has refuted claims made yesterday (26 May) by British short seller Shadowfall that it had overstated cash levels flowing through the business.

In a statement issued this morning, following a 12%+ drop in the group’s share price on Tuesday prior to it making a recovery later in the day, the group countered allegations of understating costs incurred by its Pretty Little Thing (PLT) division and therefore overstating group profitability.

In a 53-page report and in shorter form on social media, Shadowfall claimed it believed Boohoo had been offering a misleading impression of its cumulative free cash flow (FCF) by 67% since 2014. Most recently, it alleged, FCF in the 2019-20 financial year was misrepresented by 65% – or £32.5 million.

The alleged accountancy error was said to be partly due to failing to take into account tax payments. Shadowfall also suggested Boohoo was treating cash generated by PLT as though it owned the business outright despite there being a minority stake held in the subsidiary.

Boohoo said: “All inter-company transactions are conducted on an arms' length basis.

“The group operates a multi-brand strategy with the profitability of its more established brands such as Boohoo and PLT being significantly ahead of the group's adjusted EBITDA margin of 10.2%; with that higher margin being reinvested into new opportunities and brands that the group has started or acquired in recent years such as BoohooMAN, Nasty Gal, MissPap, Karen Millen and Coast.”

The online retailer also said that FCF is disclosed in its annual results published on 22 April 2020, containing what it described as clear definitions.

It also said it disclosed at the time of the acquisition of the majority of PLT, and in its latest annual report and accounts, that the group has the option to takeover the remaining 34% minority shareholding in PLT, “with the terms of the option coming into being on 28 February 2022”.

Shadowfall suggested fellow Manchester-based online fashion player I Saw It First, whose major shareholder is Boohoo’s chairman Mahmud Kamani’s brother, could be on its list of target acquisitions. Since the coronavirus crisis took hold in the UK, Boohoo said it was raising funds for potential merger and acquisition activity as it looks to scale further.

In today’s statement, Boohoo said: “I Saw It First is an online fashion business, based in the UK, set up by Jalal Kamani in 2016, having previously worked at Boohoo Group.

“Jalal Kamani retains a small holding in Boohoo Group (0.65%). The business is an unrelated entity to Boohoo group and is a smaller competitor in a highly fragmented marketplace."