boohoo Group PLC (LON:BOO) continues to build towards its goal of becoming the UK’s largest marketplace after acquiring Arcadia’s Burton, Dorothy Perkins and Wallis brands out of administration but it’s facing important organisational challenges while its governance issues are not resolved yet.

As it happened with Debenhams, today’s £25mln deal does not include physical stores, with 2,450 shop workers facing redundancy.

READ: boohoo rescues Arcadia’s Dorothy Perkins, Wallis, Burton for £25mln

The fast-fashion online retailer said this provides a significant opportunity to grow market share across a broader demographic as well as strengthening its menswear proposition with Burton.

In fact, Dorothy Perkins can be considered the more grown-up, less edgy version of Topshop, said AJ Bell investment director Russ Mould, while Wallis targets customers aged over 30, meaning boohoo can look at retaining customers as they get older.

The integration period is expected to last for up to three months with one-off transaction and restructuring costs of £10-15mln.

Moreover, this deal is a transitional services agreement so the online giant will take over the brands while they are still trading, rather than a ‘hard stop’ and restart, which is how it normally operates, meaning that the £25mln acquisition cost also includes stock.

The trio of high street brands, which generated £428mln of revenues and an underlying loss of £14mln in the year to August 2020, were some of the stronger wholesale partners of Debenhams, also a new addition to the AIM-listed group.

Shopping spree

In fact, boohoo bought the department store chain’s brand and intellectual property out of administration for £55mln last month.

It marks a big change for the so far fast-fashion focused e-commerce player, which will branch out into the new categories of beauty, sport and homeware.

The plan is to expand the range of products sold wholesale via the Debenhams website by maintaining existing third-party brand relationships and adding new brands over time, while also selling its existing clothing brands.

With 6mln beauty shoppers and 1.4mln members of its Beauty Club, Debenhams’ beauty sales operate under a wholesale model, which Boohoo intends to continue, with new third-party beauty brands added “via the marketplace model”.

Debenhams.com, which generated revenues of roughly £400mln in its last full year, will be relaunched on Boohoo’s tech platform between March and May and will continue to wind down alongside the department stores for an unstated agreed period.

Challenges to ensue

“We are interested to see how boohoo develops the Debenhams platform, which brings in a new demographic, much greater exposure to menswear, more varied price architecture and exposure to the wider beauty market,” analysts at Peel Hunt commented.

“While it will take time to scale as an online platform, we would expect the Debenhams/Arcadia brands to be delivering over £100mln of sales by the time financial year 2023 begins, a base that may well double over the following year… Having delivered a sales compound annual growth rate of over 40% for the past three years, there is no sense that momentum is about to wane.”

The broker still has questions over how quickly the Debenhams platform scales, how this works with third-party brands and how quickly management gets a grip on the new brands.

Experts are concerned about the delivery of this ambitious initiative, which management seemed to pitch as making the fashion group more of a competitor of beauty products and food supplements giant The Hut Group (LON:THG), where its Ingenuity Commerce platform has helped boost its valuation.

The main challenges for boohoo will be management bandwidth and focus, on-boarding the beauty brands and the operation of marketplace, according to Peel Hunt, especially as the company won’t have full control over third-party stocks and fulfilment.

The broker reckons the retailer will be able to overcome these issues with time, and believes this is a great opportunity since it will gain traction in new market segments for little financial risk.

The portfolio additions also mean boohoo will be fighting on many more fronts, so the market may question whether it would be better off sticking to fashion where it is already battling massive competitors such as H&M and Zara, and where it’s also making efforts to improve governance after the Leicester factory scandal.

Governance issues not resolved yet

The sustainability effort is nowhere near finished, with weekend reports revealing boohoo has told Leicester-based suppliers to stop employing sub-contractors.

Suppliers must make all clothes in-house by March 5, which has caused concerns over how they’ll be able to pay new workers and rent space.

“boohoo now has a lot of work on its plate in sorting out the strategic direction for its plethora of newly-acquired brands. At the same it is still trying to improve standards across its existing business which means management will have to be good at multitasking or chaos will ensue,” Mould said.

“The high-profile criticism of working practices caused considerable embarrassment at boohoo and made many investors question if they should be backing a business with questionable ethics. In boohoo’s defence, it has taken the matter very seriously and has taken a series of steps to improve how it does business.”

Shares dropped 4% to 351p before close, having recovered by 67% since the July trough when the scandal emerged.