Boohoo (LON: BOO) (OTCPK: BHOOY) has yet another problem to deal with. While we've all been captivated by the goings on at Revolution Beauty (LON: REVB) Boohoo now has a problem with cuts in credit insurance cover. This is one of those things that really is never kind, just not at all kind, to the finances of a retailer. In fact, this is the sort of problem that might be an indication of BOO taking too much time to play with REVB rather than attending to the details of its own business.
The specific problem is reported in The Times: “A leading credit insurer has slashed cover for suppliers to Boohoo in a move that threatens to exacerbate the financial pressures facing the fast-fashion retailer. Allianz Trade has reduced cover by an average of 50% for Boohoo suppliers, but some have had their coverage level cut to zero, effective from September.”
Credit insurance allows a retailer to operate on a capital light model. Orders are placed, made, shipped, and the retailer may well have - online almost certainly will have - sold the goods before the bill to the production factory becomes due. So, the capital requirement can in fact be negative. It's the producer's capital, in fact, which supports the stocking requirements of the retailer.
Boohoo share price from London Stock Exchange
This is obviously great when times are good. But the credit insurers, as a matter of course, see deeper into the retailer's accounts than anyone else. And if they think they see a cash flow issue then they cut that cover they're willing to offer. Which, in and of itself, starts to cause problems. Without credit insurance, the retailer - Boohoo here - has to start paying for orders and stock in advance. Which means that they suddenly need vastly more capital. Those stock levels which were being financed by the producers now have to be financed by Boohoo itself.
Sometimes to often enough cuts in such credit cover are the beginning of the end for a retailer. Simply because of this sudden need for vastly more capital in order to gain access to stock to sell.
Now, whether this will actually happen to Boohoo is another thing. There are other credit insurers, maybe not all of them will have the same reaction. But such cuts in credit insurance are really, really, not a good sign. Not just because of the implications of why cover was cut but also the cashflow implications of it having been cut.
We'd be very nervous about Boohoo until it becomes clear how this is going to work out. Very nervous indeed.
