Boohoo could be forced to overhaul the way it operates, City warns

Boohoo could be permanently damaged by an alleged pay scandal in its supply chain, analysts warned as the fast-fashion seller vowed to set up a ‘model factory’ in Leicester following a major backlash.

A row over safety conditions and claims of illegally low wages at a supplier have sparked serious concerns among investors, experts at Barclays said, plunging the former stock market darling into an uncertain future.

Shares in Boohoo have dropped by more than a third since the Sunday Times claimed earlier this month that a Leicester garment maker linked to the online retailer was paying workers less than minimum wage.

It left Boohoo scrambling to convince investors of its ethical credentials. Boohoo is expected to publish a blueprint for its independent supply chain review later this month, with the first update due in September.

The Barclays analysts said: “Many questions are yet to be answered.

“At this stage, we think the most prudent approach is to look at a wide range of scenarios.”

If it emerges that low wages are a wider issue in Boohoo's supply chain then the cost of manufacturing could be pushed up, denting the company's profit margins.

The retailer - which denies all wrongdoing - currently makes 40pc of its clothes in the UK.

Barclays cut its forecast for the company's share price from 470p to 350p until the investigation is complete. Other probes by councils and Parliament could yet add to Boohoo's woes.

The shares dropped 1.7p or 0.7pc to 253.3p on Monday.

Retail analyst Clive Black, of broker Shore Capital, said: “If the cost for a meaningful amount of product was moved away from Leicester and assuming [higher wages], then UK-sourced products are likely to cost a lot more.”

This could ultimately force the company to hike prices, harming its competitive edge in a brutal market. The firm relies on manufacturing clothes at home so it can respond to fashion trends more quickly than rivals, and sells dresses for as little as £5.

It said it was planning to launch a "model factory" in Leicester to ensure workers are treated fairly.

Mr Black said: “Brand damage could be very serious indeed, and could have notable ongoing [impact] for Boohoo's shares."