Can THG’s share price withstand profit warning?

THG’s share price buckled last week after a trading statement in which the ecommerce retailer said that it had missed revenue expectations and warned on full-year profit. This follows a run of bad news for the owner of Zavvi, after its much-vaunted IPO in September 2020.

THG’s [THG.L] share price came undone after the group warned on profit for the fourth time in 12 months after a major revenue miss. In a trading update, the company said full-year revenue grew by 3.3% to £2.25bn, compared to a forecast growth of 10-15%. Core earnings were downgraded to £70-80m for 2022, from a forecast £100-130m. Analysts had been expecting £98m. The company reiterated its medium-term adjusted EBITDA margin of around 9%.

However, the beleaguered business has managed to make some much-needed cost savings. An internal reorganisation, including the axing of 2,000 jobs, resulted in £100m in savings, with a further £30m targeted in 2023.

To cut losses further, THG is reviewing the future of its non-core loss-making units. The review would lead to a “simplification” of its business. Under scrutiny are websites and divisions under the THG OnDemand division, which includes Zavvi and Pop In A Box.

To boost earnings, THG wants to focus on its beauty and nutrition businesses. Sales in both THG Beauty and THG Nutrition grew 9.4%, according to the trading statement. The company will also look at its ecommerce solution Ingenuity.

What’s happening with THG’s share price?

The THG share price fell more than 8% in early trading in London Tuesday, as investors digested the latest trading update and profit warning. By the end of the week the stock had slid 17.46%.

This continues a downward trend for THG’s share price. The stock has lost more than 90% of its value since the company went public in September 2020. Since hitting a 52-week high of 159.24p on 27 May, THG’s share price has dropped over 64%. Friday saw bargain hunters out in force with the stock climbing 10.29% to close the week at 54.54p.

Negative press drags on investor sentiment

The profit warning marks another tough week for the e-commerce health, beauty and nutrition retailer, which owns a number of direct-to-consumer retail sites, including sports nutrition brand Myprotein and specialist beauty retailer Lookfantastic.

January also delivered news that a loan to build its new head office near Manchester Airport had been cancelled. Trafford council had agreed the £67.5m debt facility in April 2021. However, since then no work has begun on the project and THG has not drawn on the loan.

In December, the Guardian reported that credit insurer Allianz Trade had reduced its credit insurance cover for THG’s suppliers, amid looming recession concerns. The cut in credit insurance could put pressure on THG’ s cashflow, as suppliers may seek upfront payment in the absence of sufficient insurance protection against the retailer going under.

In October, SoftBank sold its entire stake in the company to THG co-founder Matthew Moulding and the Qatar Investment Authority. The Japanese bank made a £450m loss on the transaction, having only picked up its 8% stake in May 2021. In July Softbank pulled out of a £1.6bn deal that would have seen it take a 20% stake in Ingenuity.

More widely, there remain concerns over the company’s corporate governance, which were only partly assuaged by the appointment of independent chairman, Charles Allen. THG has also had to contend with the general sell-off of tech and online retail stocks in these challenging macroeconomic conditions.

Where next?

THG went public in September 2020 in what was one of London's biggest tech IPOs. In the first day of trading THG’s stock shot up 30%, giving the company a £5.4bn valuation and easily dispelling disquiet over corporate governance issues. The listing was at the height of the pandemic and the concomitant boom in online retail.

However, as Lex Populi points out in the Financial Times, the excitement of new technology stock has faded. As of Friday, THG’s market valuation was £699.78m, a far cry from the level seen a couple of years ago. Where THG goes next is unclear.

Despite the profit warning, the company has been able to grow revenues, even if these have missed expectations. Shareholders will want to see prudent cost cutting this year and fewer negative news stories in the financial press.

Of the 11 analysts offering price targets on the Financial Times, THG has a median target of 55p. Hitting this would see a 0.8% upside on Friday’s close.