UK Edition
Boohoo came under attack on Tuesday from a British short-seller that claimed the online retailer had exaggerated the amount of cash flowing through its books.
Shares in the online fast fashion firm fell by more than 12pc after investor Shadowfall revealed it had bet on a share price fall. The stock later staged a partial recovery, ending the day 6.8pc lower at 334.9p which valued Boohoo at £4.1bn.
Shadowfall claimed in a 53-page report that the AIM-listed firm had overstated its free cashflow this year by £32.2m, or 65pc, partly because it failed to take into account tax payments.
It also alleged that the company was treating cash generated by its PrettyLittleThing subsidiary as though it owned the business outright despite there being a 34pc minority stake, which includes shares owned by the son of Mahmud Kamani, its chairman and co-founder.
It could cost Boohoo almost £1bn to buy this stake, Shadowfall said, adding that Umar Kamani - a director and shareholder of PrettyLittleThing - “must be rubbing his hands with glee at the prospect”.
Short-sellers make money when a company’s stock price falls. They do this by borrowing shares, selling them and then buying the stock back at a later date. If the value has dropped in this time, the short sellers pocket the difference before returning the shares to their owner.
Shadowfall said shareholders could have their interests diluted if Boohoo takes advantage of an option to buy out the minority interest in PrettyLittleThing in early 2022.
The short-seller also claimed that PrettyLittleThing’s finances were flattered because some of its costs were borne by other parts of Boohoo’s business. Rival firm ISawItFirst could threaten Boohoo’s market position, the short-seller said.
A Boohoo spokesman said: “The Shadowfall note is without merit. The Boohoo group cashflow statement has full transparency with all individual elements of cashflow itemised for all to see.
“The profitability of PrettyLittleThing is the real situation and has not been inflated since all costs have always been charged to PLT on a totally arm’s length basis.
“The option to buy out the 34pc minority in PLT runs until February 2022 and the agreement provides for it to be done at market value less a minority discount.”
London-based Shadowfall’s previous targets have included magazine publisher Future, which suffered an initial 18pc plunge in shares when the firm attacked its strategy in January.
The firm’s website claims that it ”seeks truths hidden by aggressive corporate accounting, flawed business models and unethical practices within listed companies”.
Shadowfall’s criticism of Boohoo is the the latest high profile short attack on a London-listed firm. Pets at Home refuted claims earlier this month by Texas-based company Bonitas Research that it was untruthful about a £34m loan.
NMC Health plunged into administration in April after criticism by Californian firm Muddy Waters set in motion a series of revelations over the FTSE 100 firm’s finances, which are now being investigated by the City watchdog.