- Profit warning follows lower than expected sales
- THG reviewing non-core, loss-making divisions
- Further £30 million of savings targeted for delivery in 2023
Shares in online health and beauty retail business THG (THG) fell 5.5% to 65p after the once hyped e-commerce player coughed up another profit warning following a slowdown in sales growth.
While many retailers are saying trading has held up pretty well, THG bucked the upbeat trend with its latest earnings alert and said it is reviewing the future of loss-making businesses outside of its core beauty, nutrition and Ingenuity divisions.
WHAT’S BEHIND THE LATEST WARNING?
Manchester-headquartered THG generated record sales of £2.25 billion in the year to December 2022, yet year-on-year growth of 4.1% was shy of consensus and sales in the festive fourth quarter sales fell 7.9%, down from the 2% growth eked out in the third quarter.
As a result, THG now expects to deliver adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) in the £70 million to £80 million range for 2022.
That represents a massive downgrade from previous guidance of £100 million to £130 million, with THG pinning the blame for the earnings shortfall on the sharp sales growth slowdown as well as higher raw material prices, transport disruption and contract timing issues in its Ingenuity division.
WHAT IS MOULDING SAYING?
However, chief executive and founder Matthew Moulding said he was ‘especially pleased with the progress of Ingenuity, successfully competing with major global technology giants to transform digital operations for global retailers and brands.’
He added: ‘With the completion of the divisional reorganisation, and around £100 million of annual efficiency savings already delivered, the group enters 2023 with strong momentum to achieve substantial margin expansion.
‘Core commodity prices used within our nutrition division have seen significant deflation since their record highs in 2022, giving us confidence in significant profit progression as we move through the year ahead, against a much reduced group cost base.’
EXPERT VIEWS
Liberum Capital still thinks THG needs to provide ‘a clearer picture on the long term profitability and cash flow generation of the business and deliver (profitably) on some of the “whale” clients for Ingenuity Commerce before confidence recovers fully.’
AJ Bell investment director Russ Mould pointed out THG’s sales growth has gone from 35.1% in 2021 to 4.1% in 2022 ‘with the OnDemand division almost griding to a halt after being one of the strongest parts of the business a year earlier’.
Mould explained: ‘Just as many bricks and mortar retailers have been forced to review their business and focus on what they do best rather than continuously try to expand, online players are also doing the same.
‘We’ve seen a period of rapid sales growth for online entities, but times are changing. At the end of the day, it’s all about profit and cash flow, and if anything is acting as an impediment then it must change or go.’
Mould added: ‘If the stock market doesn’t buy into THG’s realignment efforts that raises the chances of founder and CEO Matt Moulding finding someone to help him take the business private.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor of the article (Steven Frazer) own shares in AJ Bell.
