Boohoo Group PLC (LON:BOO) said it “strongly refutes” a number of allegations against its business as it fired back against a report by a short-seller that accused the fashion chain of overstating profits and cashflow.

The retort followed a report on Tuesday from hedge fund ShadowFall, founded by ‘Dark Destroyer’ Matthew Earl, on how it was accounting for subsidiary Pretty Little Thing (PLT).

READ: Boohoo proposes share placing to raise £200mln to snap up acquisitions

The hedge fund said Boohoo was counting PLT as if it was wholly owned by the company, when in fact 33% of the subsidiary is owned by Umar Kamani, the son of Boohoo co-founder Mahmud Kamani. Shadowfall also alleged that as a result of this Boohoo was also not properly allocating costs for Pretty Little Thing.

Shadowfall estimated that it would cost Boohoo around £1bn to buy out the minority stake in PLT and that “maybe this is why BOO continues to build up so much cash and not distribute it to its shareholders?”

Shadowfall also postulated that Boohoo is facing competition in the market from fellow online retailer ISawItFirst (ISIF), which it said is majority-owned by Jalal Kamani, the brother of Mahmud Kamani, and the company could potentially target his stake as well as the PLT minority holding for acquisition.

“Perhaps after BOO buys out the Chairman’s son’s [non-controlling interest] in PLT, it will set its sights on buying the Chairman’s brother’s stake in ISIF? Or maybe, since ISIF is gaining considerable traction on Instagram and search rankings, ISIF will continue to compete with BOO? Either way, it doesn’t seem clear to us how BOO’s shareholders would benefit”, Shadowfall said.

Boohoo fights back

Responding on Wednesday, Boohoo said its free cash flow statements contained “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”, adding that it “strongly refutes any allegations of understating costs incurred by PLT, thereby overstating its profitability”.

Regarding the minority stake in PLT, Boohoo said while it had recognised the interest at a statutory level, for adjusted earnings per share, the group deemed it appropriate to recognise the full 100% of the 34% of PLT’s adjusted profit after tax to “allow its shareholders and readers of the accounts to fully understand PLT’s underlying profitability”.

“To not do so would risk over-stating the group’s current adjusted earnings per share, and understate the minority shareholders’ likely future interest in the after-tax profits of PLT”, Boohoo said.

Regarding ISawItFirst, Boohoo said Jalal Kamani retained a “small holding” in Boohoo of 0.65% but ISIF was “an unrelated entity to Boohoo Group and is a smaller competition in a highly fragmented marketplace”.

Boohoo still a buy, says broker

Analysts at Peel Hunt retained their ‘Buy’ rating and 400p target price on Boohoo, saying that the report was “no ‘shock & awe’ note in the sense that these are all known factors and there are no accounting concerns raised here either”.

“The key thrust of this note is that boohoo will need to act on the PLT minority in 2022; either acquiring it at market value less discount, or by paying out the distributable reserves to date. That’s entirely true and not new information; clearly, the valuation will be key here, as will the growth profile and performance of the PLT brand at that time”, the broker said.

“We see no issues with the disclosures raised concerning FCF or the profitability of PLT. boohoo group remains one of the sector’s leading lights, following a brand acquisitive strategy”, Peel Hunt added.

The company’ defence appeared to have calmed investors, with Boohoo shares 1.3% lower at 333.8p in late-afternoon trading on Wednesday, valuing the AIM-listed business at £4.4bn.