Boohoo hits back as short-seller drives share price lower over cash flow claims
Boohoo has hit back after its share price plummeted on Tuesday following claims by a ‘short-seller’ that the cash flow going through its books wasn't as high as it said.
The firm is one of the few fashion companies to see its sales rising in recent periods and this has helped to boost its overall company value as its shares have risen strongly, despite the generally falling stock market.
Cash flow is hugely important in the middle of the coronavirus crisis and investor Shadowfall casting doubt on the level of Boohoo’s cash flow is a big issue.
The point for Shadowfall is that short-sellers can make huge amounts of money by gambling that a share price will fall and if it doesn't, they can lose a lot. That’s because they borrow shares, sell them, then buy them back at a later date. If their value has fallen by the time they buy them back, they keep the difference then return the shares to their owner.
The short-seller issued a detailed report saying that Boohoo’s free cash flow had been overstated by 65% (or more than £32 million) due to the firm not taking tax payments into account.
And it said cash generated by the PrettyLittleThing label was being treated as if the firm owned the company outright, rather than holding a two-thirds stake.
But on Wednesday, Boohoo said it “strongly refutes the allegations made in the research note”.
It said its free cash flow disclosure “contains clear definitions, alongside a full reconciliation down to net cash flow for the financial year, including items such as tax paid and dividends paid to minority shareholders”.
And it added that "international accounting standards require the group to fully consolidate its cash flows, and its treatment of this with respect to its subsidiary, PrettyLittleThing reflects this conformance with accounting standards”.
It continued with a further detailed rebuttal of the key points in Shadowfall’s report, including claims that PLT’s profitability had been overstated and that the firm’s option to buy a larger PLT stake could see existing shareholders’ having their holdings diluted.
Investors seem to have been partly (but not fully) appeased by all this. The shares had initially fallen 12% but later partially recovered and closed down almost 7% at 334.9p, valuing the company at £4.1 billion. That said, the shares fell nearly 3% more on Wednesday morning.
Some volatility in the share price is to be expected given the uncertainty at present. But the shares — and the firm’s market capitalisation — are still more than double their price on March 18 when they hit a pandemic-linked low point. And despite the fall, the share price still remains higher than at almost any time since the company first listed.
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