Boohoo Group PLC (AIM:BOO) delivered a big fall in profits today and blamed a higher rate of returns as a major cause, but this is all part of the cost of doing business and is just another sign of the online retailer adjusting to changes brought about during the pandemic.
Interims from the London-listed company released saw adjusted profit nosedive 90% which in turn led to shares slipping 5% in the morning, but ease off later.
The rate of returns is an issue Boohoo and its competition have been highlighting for months, with the AIM-listed fashion retailer saying return rates were significantly higher year on year and ahead of pre-pandemic levels.
Online retailers factor returns as part of the cost of doing business, and while more customers sending products back isn’t ideal, it shouldn't be too much of a concern.
What sparked more returns?
While Covid might be a thing of the past for many of us, online fashion is still readjusting from the changes seen during the pandemic.
Consumer buying habits fundamentally changed during lockdowns, as well as demand for different types of clothes, with tracksuits, loose-fitting jumpers and generally comfier, less smart clothes being favoured among shoppers.
Those clothing items experience fewer returns as customers will not mind how it fits or the colour as well as other factors, according to retail analyst John Stevenson at Peel Hunt.
“When you’re buying T-shirts, return rates are relatively low compared to when you’re buying dresses,” said Stevenson.
“Return levels actually collapsed during the pandemic to be much lower than normal.”
As offices, pubs, restaurants and the like re-opened their doors to the public, the demand for dresses, formal clothing and ‘going-out’ clothes returned.
Naturally, consumers will be pickier with these items to ensure they have the right fit and the right colour.
With almost 18 months of not buying such clothing, wardrobes needed, and still need, a major revamp.
For retailers like Boohoo and Asos, this meant consumers ordering more items than they need before returning all but a few.
Boohoo largely offers these formal and outgoing clothing in comparison to Asos, for example, which means it is feeling the high level of returns more than most.
“There is a much stronger mix of dresses and formal in particular and these are categories with a much higher level of return nationally.”
Is it a concern?
“Ultimately, online-only retail models are based on high volumes and thin margins,” said Russ Mould, an investment director at AJ Bell, who adds that the high return rates are eating away at the margins.
Rosalind Hunter, a partner at global consultancy Simon-Kucher & Partners echoes this view. “The levels of returns have grown and this can render many more orders unprofitable,” she said.
However, retailers should factor this into their pricing model as a cost of doing business.
Online retailers build their models on the basis that they will receive a high number of returns and factor in any of these costs before deciding on prices.
Often those returning the most are also the most loyal customers, said Stevenson, who will also buy more.
Increases in cost inflation as well as logistics and fuel may have exacerbated the situation from a financial viewpoint, making it more costly to return items.
Boohoo’s decision to charge £1.99 for each parcel sent back did little to stem the flow of returns, but undoubtedly would help the balance sheet slightly.
“A number of brands now charge returns, and it is not having any impact on behaviour from consumers,” Stevenson said.
“You think it might affect how people buy and return but it hasn’t at all. Basket levels, spending, and return rates are all the same so its not changed habits, but they’re obviously getting a contribution from that.”
For the sector which has been lamenting the high rate of returns for most of the year, it is arguably the least of its worries as it tries to navigate the tough market and economic backdrop, with this realisation by investors as the day went by possibly leading to the shares bouncing to a 7% gain by the close.