In a recent statement to the stock market, fast fashion retailer Boohoo announced that it will be closing its 1.1 million sq ft distribution centre in Pennsylvania. Moving forward, Boohoo plans to fulfil all US orders from its automated warehouse in Sheffield, UK.
The Manchester-headquartered company claims this strategic shift will broaden its product offering for US customers and expand its market routes. However, this move appears to be primarily driven by cost reduction efforts. Executive chairman Mahmud Kamani has been navigating numerous challenges recently, including intense competition from Chinese brand Shein and ethical concerns regarding supplier treatment.
Despite Boohoo’s optimistic projection when it opened the Pennsylvania warehouse in August 2023, the facility will cease operations by 11 November 2024. Initially, the warehouse was expected to enhance the brand’s fortunes by reducing delivery times for American customers. However, orders placed in the US, which remains Boohoo’s largest overseas market with sales of approximately $400 million in the 2022/23 financial year, will now be processed in the UK, resulting in a delivery timeframe of eight to ten days.
Boohoo asserts that a recent trial revealed US customers value a wider product range over faster delivery times. The trial indicated that US consumers had previously been offered only 60% of the styles available in the UK. The company is excited about opportunities in the US and is developing broader market strategies, including a recent collaboration with Nordstrom to launch Nasty Gal in their stores.
The closure of the Pennsylvania distribution centre, operated by a third-party under a property lease, will lead to a write-down on Boohoo’s balance sheet and incur one-off exceptional cash costs. However, these changes are expected to significantly reduce ongoing costs in the medium term. Further details will be provided in the company’s half-year results.
The Kamani family, founders of Boohoo, are now the second-largest shareholders following an increase in stake by Mike Ashley’s Frasers Group to over 25%. This move is described as a strategic investment. In May, Boohoo averted a shareholder revolt by withdrawing a controversial bonus scheme. Bonuses totalling £1 million in cash and shares were approved for Mahmud Kamani and key executives despite not meeting targets.
Analysts Anubhav Malhotra and Wayne Brown from Panmure Liberum commented on the announcement, stating that Boohoo’s decision to revert to the UK-based distribution model aims to right-size the cost base and improve US profitability. However, they cautioned that this might indicate reduced ambitions for scaling up the direct-to-consumer business in the US and a shift towards exploring alternative market routes, such as the Nasty Gal launch in Nordstrom stores. They believe the decision will enhance underlying earnings but at the expense of breaking the lease and incurring sunk capital investment costs.
Boohoo’s decision to centralise US order fulfilment in the UK marks a significant shift in its strategy. The company’s efforts to balance cost reduction with market expansion will be closely watched, particularly as it navigates the challenges posed by intense competition and ethical scrutiny.
