December 5, 2022

Shares in UK ecommerce group THG took a fresh hit on Tuesday after the company warned that revenue growth and profit margins were set to miss forecasts.

THG, hailed as a rare UK tech success when it floated in 2020, said margins before interest, tax, depreciation and amortisation would be 7.4 to 7.7 per cent for 2021, shy of analysts’ expectations of about 7.9 per cent and below historic margins of above 9 per cent.

The Manchester-based group pinned most of the blame on movements in exchange rates and commodity prices, particularly whey protein which more than doubled in price last year. The company, whose brands include Lookfantastic and Myprotein, has raised prices for many of its fitness products by up to 30 per cent to help offset the increases.

Higher costs for freight and labour along with the costs of integrating acquisitions in the beauty business — which the group is considering listing separately or selling — have also contributed.

THG said margins should recover this year and into 2023 as commodity prices ease and as technology division Ingenuity — which has much higher margins than the two main ecommerce businesses — accounts for a greater share of group revenue.

It also said sales growth for 2022 would be 22 to 25 per cent compared with market consensus of 26 per cent. Asked about the potential impact of squeezed household incomes, co-founder and chief executive Matthew Moulding said the company had historically been resilient.

“Our product categories tend to be one of the last things people stop spending on,” he told analysts, pointing to relatively modest average basket sizes of roughly £45.

The company, formerly known as The Hut Group, has been battling to win back investors’ confidence after a dramatic share price slide in the final few months of 2021. The stock was down 9 per cent to 169p in early trading on Tuesday, 66 per cent below its 500p listing price.

Market scepticism has centred on Ingenuity, which provides technology and services for brands wanting to sell direct to consumers online. An option agreement to sell a stake in the division to SoftBank has led to greater scrutiny of its growth and profitability.

THG reiterated that Ingenuity Commerce, the end-to-end package that has the highest margins in the division, should generate sales of £108m to £112m in 2022, against £45.4m in 2021.

THG’s co-founder John Gallemore said roughly 85 per cent of this revenue was from existing or pending contracts, such as the one with value retailer Matalan announced last month, and the group was “super confident” it would be achieved.

The company declined to give an update on the sale of part of Ingenuity to SoftBank, however. Commercial director Steve Whitehead said the company was “very busy behind the scenes” preparing the ground for the stake sale, scheduled for some time in the first half of 2022. “Hopefully we will deliver ahead of that,” he added.

There has been speculation that SoftBank will not now exercise the option, given that it values Ingenuity alone at more than the entire market capitalisation of the group.

THG has attempted to halt the decline in its share price by providing more information and forecasts around Ingenuity and pledging to appoint more independent directors, while Moulding has promised to end a “special share” takeover defence earlier than scheduled.

Full-year sales at the group were £2.2bn, up 27 per cent on last year, and would have been about £2bn without acquisitions made during the year. At its initial public offering in September 2020, THG predicted 2021 revenue of £1.75bn.

https://www.ft.com/content/a68e449b-8a0e-4d95-aa18-4e6efb2b2863