It has been a tumultuous month for Boohoo.

The online fast fashion house saw its shares climb to a record high at the end of June, driven by the companys lean and agile business model that has continued to perform well during the coronavirus crisis.

It has been able to quickly respond to pandemic-induced trends, such as the switch in demand from eveningwear and holiday clothing to tracksuits and other loungewear. Its youthful customer base has continued to spend, and its online-only model has thrived whilst traditional retailers on the high street are struggling to survive.

Despite experiencing a marked drop in demand when lockdown was introduced, it quickly returned to growth by the end of April and that seems to have only continued to improve. Revenue in the three months to the end of May shot up 45% - delivering solid double-digit growth across all its geographies and established brands.

But Boohoo shares lost nearly half of their value between 30 June and 15 July, rocked by allegations that its low-cost model is underpinned by a troublesome supply chain. Shares have recovered some of their value but are still trading over one-third less than the all-time high. It has been enough to knock Boohoo off its perch as the most valuable company listed on AIM, and the fact that it lost the title to rival ASOS makes it all the more hurtful.

Read more: Boohoo shares tumble after allegations against its suppliers

We have a look at the allegations that have injected volatility into Boohoo shares and what the long-term impact may be, as well as a look at whether the sell-off in Boohoo shares has been overdone.

Boohoos supply chain has come under severe scrutiny after reports from The Sunday Times suggested a garment factory in Leicester that supplies Boohoos Nasty Gal brand was paying staff below minimum wage and not adhering to lockdown rules.

The paper sent in an undercover reporter that said the factory had continued to operate when the city was put into a local lockdown, all without any additional measures taken to protect to staff. It was then argued that this could have contributed to the rise in cases in the area. The reporter was also told to expect 3.50 an hour, well below the minimum wage of 8.72 for over-25s. Other media outlets reported that some furloughed workers were being told they would not receive their government support if they didnt continue to work.

Boohoo responded by stating it was shocked and appalled by the recent allegations, adding it was committed to doing everything in our power to rebuild the reputation of the textile manufacturing industry in Leicester.

One of the reasons Boohoo is able to keep costs down is because it designs its own clothing but outsources the manufacturing. In terms of assets, it has two major distribution centres that it uses to ship its products around the UK and the world. This means it makes sense for the company to source clothing made close to home, and around 40% of its products are made in the UK, which it argues protects thousands of jobs that would otherwise be lost to cheaper foreign workers abroad.

Leicester is the countrys hub for garment making and Boohoo is thought to be its biggest customer. A report by Labour Behind The Label, which campaigns for garment workers rights around the world, said Boohoo was ordering up to 400,000 units from Leicester per week during lockdown in April, up from 120,000 in a normal week. This is thought to account for up to 80% of Leicesters entire capacity, which is met through a number of small factories.

Boohoo has tried to add some clarity to the situation. It said the company subject to media reports was not a direct supplier, meaning it was a company that was used by one of its own suppliers. It said the garments were not made in the UK but in Morocco, and were simply being repackaged in Leicester so they could be sold in the UK. It also said that its investigation to date has not found evidence of suppliers paying workers 3.50 per hour.

Those claims have, so far, held up. No less than seven different UK authorities ranging from anti-slavery and immigration to the police and the council found no foul play in their initial round of investigations, but we can expect more surprise inspections going forward.

Plus, it has already attracted the attention of politicians, who have pledged to clean up Leicesters garment industry, where concerns over conditions have been rife for years. Home secretary Priti Patel said the claims were truly appalling and said the government was committed to stamping out malpractice.

Boohoo said it would not hesitate to end its relationships with any suppliers that were not meeting its code of conduct, and that this includes very clear expectations on transparency about second tier suppliers.

It has launched an independent review of its UK supply chain which will be led by Alison Levitt QC and committed 10 million to eradicate supply chain malpractice. It has also accelerated its review of its third-party supply chain and its ethical audit.

The investigation will not be quick, which means this issue will linger over Boohoo for at least the rest of this year. It will set out the scope of the review by the end of July, but said it intends to provide updates when it releases its interim results in September, and again when it publishes a trading update for its peak trading season in January 2021.

It then intends to inform shareholders about how it will ensure Boohoo is sustainable when it releases its annual results in April or May 2021. That suggests its supply chain will be under the spotlight for some time.

The problem for Boohoo is that investors have become concerned that its low-cost, fast fashion model is underpinned by underpaid workers that are treated unfairly. We wont know how true this is if at all until the investigation starts to give us some answers.

But, regardless, this has highlighted a major problem for Boohoo and other fashion firms. The fact Boohoo said it was shocked by the situation shows how opaque its supply chain is. Boohoo concerns itself with its direct suppliers those that supply the end product but not the other businesses used by those suppliers. It has highlighted the need for greater transparency in the supply chain, and that will have to become a top priority for Boohoo if it wants to assure investors.

The Conservative chair of the Environmental Audit Committee, Philip Dunne, sent a letter to Boohoos co-founders Mahmud Kamani and Carol Kane that said it was shameful Boohoo didnt know what was going on. It is incredible that, over a year since the committee highlighted illegal working practices in its supply chain, Boohoo has publicly denied any knowledge of what has been happening for years, he said.

The letter also accused Boohoo of being unwilling to engage with trade unions and the Ethical Trading Initiative (ETI), which is an independent body that promotes workers rights. Last year Boohoo told us that it was going to join the ETI. We note it has not done so. It is shameful that it took a pandemic and the ensuing outrage about working practices in their supply chain for Boohoo finally to be taken to task for turning a blind eye, said Dunne.

For now, the damage is being done to its reputation. That hasnt been helped by the fact it said it would pay up to 150 million in bonuses to its board and founders so soon after accusations that factory workers are being grossly underpaid came to light. The fact the bonuses are only based on the companys share price performance rather than the business itself has also raised eyebrows.

Some of its major shareholders have flagged concerns. Jupiter Asset Management, the second largest shareholder in Boohoo behind co-founder Kamani, actually raised its stake in the business after the allegations were made to capitalise on the slump in its share price. But Standard Life Aberdeen, apparently not convinced, was reported to have dumped almost all of its stock in Boohoo just days after the allegations were made.

Boohoos wholesale business has also been hit after a number of retailers, including rivals ASOS, Next and Zalando, all pressed pause on buying Boohoos clothing until they get clarity over the situation. However, the wholesale division accounts for just 4% of Boohoos annual revenues, and just 1.4% of sales in the first quarter, so this loss is highly manageable.

The fashion industry being accused of dodgy supply chains is nothing new, but the fact Boohoo has been caught out in the UK has brought it into the spotlight because, quite simply, people pay more attention when the problem is on their doorstep rather than elsewhere.

The main task will be increasing transparency of its entire supply chain and addressing whatever horrible truths that could unveil.

Still, we are yet to see any evidence that its reputation has been harmed to those that matter the most, or that its young customer base has been turned off Boohoos brand. Sales figures will be closely watched over the coming quarters, but there is little expectation that demand has been severely hit by the allegations.

At worst, the investigation will reveal that Boohoos supply chain is not fit for purpose and that the cost of production goes up, which in turn would push up prices because of Boohoos cost-plus model. But this shouldnt pose too much of a problem for Boohoo because it boasts superior profitability over its rivals, so it can afford to absorb higher costs if it must.

For example, ASOS generates more than twice the amount in revenue than Boohoo but its lower margin. Boohoos edge comes from the fact it sells its own products and has a lean model that outsources everything, from manufacturing to information technology (IT), whereas ASOS and others sell more third-party products bought from other labels.

ASOS said earlier in July that revenue in the three months to the end of June had risen by 10% year-on-year.

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