(Bloomberg) — Shares in online U.K. clothing retailer Boohoo Group Plc plummeted to a five-year low after the online retailer issued a profit warning as customers returned more products in the U.K. and steep freight costs in the U.S. dampened demand there.
Boohoo said it expects an adjusted earnings margin of 6% to 7% in the current fiscal year, in a statement Thursday. That compares to previous guidance of 9% to 9.5%.
Boohoo, which also owns the brand PrettyLittleThing, also revealed a sharp slowdown in demand with net sales growth expected to be 12% to 14%, down from an earlier forecast of 20% to 25%.
Shares in Boohoo fell as much as 20% in early trading in London Thursday.
The downgrade in outlook is a blow for Boohoo which has been trying to recover from a labor supply scandal in 2020 which precipitated a comprehensive overhaul of governance at the e-commerce retailer.
Boohoo blamed the sharp fall in performance on the fact that the U.K., its core market, has been hit by significantly higher returns as customers send back items they don’t want. Returns can be very costly for retailers to handle.
Online retailers, including Boohoo’s rival Asos Plc, were buoyed during lockdowns as returns fell as customers were buying more casual clothes for working from home and were less likely to send them back. As normal shopping patterns have resumed as lockdowns eased, returns have risen again.
Boohoo is known for its going out and party wear outfits which generally do have a higher returns rate. Its mostly younger shoppers can buy multiple outfits to try on for an event and then only keep the one they choose to wear, returning the others.
Boohoo’s growing business in the U.S. has also been hard hit by supply chain disruptions and steep freight costs. The group had previously warned in September, when it lowered its forecasts for sales and profitability, that it was being impacted by higher shipping costs. The supply snags have pushed its delivery times for customers in the U.S. to as much as ten days, which has dented demand as shoppers switch to retailers with faster fulfillment speed.
In a sign of how global supply chain disruptions and rising shipping costs are hitting retailers, Boohoo said it had experienced inbound freight cost inflation of 20 million pounds. It was also hit by 45 million pounds of cost inflation in shipping goods to international markets, including the U.S., which is a key growth area for Boohoo.
The online retailer also expects an exceptional cash hit of about 33 million pounds ($44 million), up from a previous estimate of 22.5 million pounds, primarily due to warehousing costs and “new brand restructuring.”
Chief Executive Officer John Lyttle said he is highly confident about Boohoo’s future growth prospects and maintained the group’s medium-term margin guidance of 10%. He said the current “headwinds” are short-term and transitory in nature although warned that the emergence of omicron added further uncertainty to the outlook with even more shopper returns likely in January and February.
(Updates with shares in fourth paragraph and additional information throughout)
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