Online fashion giant Boohoo has revealed that profits slumped and costs soared as it struggled to get to grips with difficulties caused by the pandemic.

Bosses said pre-tax profits for the 12 months to the end of February plunged to £7.8 million from £124.7 million a year earlier as distribution costs rose and customer demand fell.

The news sent shares in the firm tumbling on Wednesday, dropping more than 15% by mid-morning.

They also warned that Boohoo expects high costs to persist throughout the rest of this year but have a series of cost-cutting initiatives in place to manage the business.

Despite the cost-cutting, prices for products could also rise, with the company only committing to “mitigate where possible before passing prices on to consumers”.

Sales were up 14% on the year to £2 billion and remain well above pre-pandemic levels, as high streets closed and shoppers turned to online.

Boohoo revealed that, since the easing of restrictions, customers have flocked back to physical stores but those using its services have increased the number of garments being returned.

Return rates are a key metric for online fashion retailers and there had been a significant reduction during the pandemic.

But, with restrictions easing, customers have started going out more and return rates have increased to above the level seen before the pandemic.

Boohoo also revealed that return rates have been so high in the past three months that this has led to sales falling compared with a year ago.

The rising costs of deliveries for the company – including a reduction in airfreight capacity and higher shipping prices – along with lower-than-anticipated growth contributed to a £60 million hit to profits, it added.

The company said: “In our largest market, the UK, growth has remained strong, compounding on the exceptional growth delivered in the previous year.”

It added: “Growth has however been impacted by three factors: firstly, returns rates increased significantly in the second half of the year ahead of both expectations and pre-pandemic levels; secondly, consumer demand has been subdued as a result of lockdowns in key markets throughout the year; and thirdly, our proposition internationally has been negatively impacted as a result of extended delivery times.”

Boohoo said it also expects the pandemic-related external factors that affected last year “will continue for the year ahead”.

To combat the falls, bosses said they will be targeting sourcing from suppliers closer to the UK, reducing inventory levels and investing in new distribution hubs in the US.

Boohoo will also upgrade its Debenhams technology platform and sign up new wholesale partnerships.

Analyst Julie Palmer, partner at Begbies Traynor, said: “The outlook isn’t pretty, with inflation a real concern for this outfit, and falling consumer confidence may mean customers thinking twice before refreshing their wardrobes as we head into summer.

“Throw in the costs of a new factory in Leicester after allegations two years ago the company wasn’t paying workers the minimum wage, along with spending on new distribution centres as it prepares for hoped-for expansion, and Boohoo has a lot of ground to make up.

“Boohoo is going to have to come up with some new looks if it is going to stay relevant as it doesn’t take long for consumers to shop around for faster, more relevant alternatives these days.”