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THG (LSE: THG) has underperformed spectacularly since going public in early 2021. During this period, the UK stock lost almost 93% of its market value.
Yesterday (17 September), the e-commerce company formerly known as The Hut Group reported its interim results. The market reaction was negative and the share price has since fallen by 15%.
Shall I buy the dip? Let's find out.
Disappointing results
THG has three categories:
- THG Nutrition specializes in supplement products and owns the MyProtein sign
- THG Beauty has a wide range of beauty products, including SeeFantastic
- THG Ingenuity is the ultimate e-commerce platform offering technology solutions for retailers
In H1, revenue in Beauty (its largest category) increased by 6.9% year-on-year to £531m. Intellectual income jumped 14.1% to £80.2m, but was more than affected by a 7.5% fall in sales (£299m) at its Nutrition business.
Overall, this means group revenue increased by 2.2% to £911m, excluding £23m of amortized income. Adjusted EBITDA improved by 3.6% to £48.8m, translating into a margin of 5.2% (an improvement from 4.9%).
Management said their health food business grew in the third quarter (currently), and they see a return to growth there. Beauty sales are also growing, albeit at a slower pace than competitors Warpaint in London.
Looking ahead to the full year, THG expects EBITDA to be “at the bottom end” of the current consensus range (£134m-£156m). He blamed foreign exchange pressure for this.
Given the difficult consumer situation, I would call this trade stable rather than exciting. The company still posted an operating loss of £84.4m during this period.
Three becomes two?
The big news is that THG plans to decommission its Ingenuity technology platform. This interesting but loss-making division has been dragging down the group's profits, so this could unlock shareholder value (if approved).
The company says positive cash flow from the remaining food and beauty segments could support future earnings.
However, I note that Ingenuity generated £226m of its £306m in revenue from THG itself during H1. Only £80m comes from elsewhere, so there will be a lot to sort out.
Also, total debt stood at £685m in June. How would that be divided? There is still a lot of uncertainty here.
Should I buy THG shares?
It's hard to know if a stock is in the bargain basement or not. On a price-to-sales (P/S) basis, it looks cheap, trading at a multiple of just 0.38.
However, I find it difficult to predict whether sales in this business will be higher or lower five years from now. Growth has been very difficult and it is still losing money, which adds risk to the investment case.
In retrospect, I also worry that its product portfolio lacks the long-term advantages that protect it from competitors. Some kind of 'moat' is the first thing I look for in an investment and I don't see it here.
Personally, I get my supplements Amazon as part of my prime membership. If I compare MyProteinsubscription benefits, I don't see a compelling reason to change. Door delivery? Free shipping? Flexible registration? Amazon offers all of that, while I re-watched AC Milan vs Liverpool last night on Prime!
All things considered, I see better stocks out there for my portfolio.
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