THG losses balloon amid takeover talks

THG (THG) – formerly known as The Hut Group – faced “unquestionably the most challenging global environment” it had ever encountered in 2022, according to founder Matthew Moulding. 

Something certainly went very wrong for the online retailer. THG's revenue edged up by less than 3 per cent in 2022, despite inflationary effects, while its operating losses ballooned from £137.5mn to £495.6mn. This was partly the result of rising costs, including “temporary investment” in its headcount following acquisitions and higher marketing fees. Even on an adjusted basis, administrative costs jumped by 17 per cent to £674mn. 

Distribution costs also remained high at £403mn, or 18 per cent of total revenue. 

A whopping £275mn impairment made the situation significantly worse, however. The impairment followed a “granular” review, and related to THG’s beauty division and Ingenuity technology arm. Management blamed the global devaluation of technology businesses over the last 18 months, as well as “macroeconomic, inflationary and interest rate pressures”.  

What next? This year failed to get off to a roaring start, with revenue from continuing operations falling by 5.6 per cent year on year between January and March. The group’s biggest division, beauty, is proving particularly lacklustre, with revenue down by 10.7 per cent. However, management stressed that profit margins were improving, and claimed it could “rebuild towards historical adjusted Ebitda margins of around 9 per cent over the medium term”.

It also emphasised the loyalty of its customer base: returning beauty and nutrition customers generated about 82 per cent of direct-to-consumer sales last year. Given THG’s long history of losses and adjustments, however, together with persistent inflation and the group’s rising debt levels, it is hard to take much comfort from this. 

THG shareholders have been on something of a rollercoaster ride of late. A day before these figures, the shares surged after the retailer revealed that it had received a takeover bid from a private equity company. Apollo Global Management has made a “highly preliminary and non-binding indicative proposal”.

Despite the negative response to THG's results, its share price is up by 72 per cent compared with the start of the year. The shares are still 90 per cent below 2021 highs, however, and we remain sceptical of the strength of the underlying business. Sell.

Last IC View: Sell, 40p, 16 Sep 2022