THG directors leave a sinking ship

It’s never a good sign when you announce the resignation of two of your directors on the same day you post an increase in pre-tax losses. Yet that is the unenviable position The Hut Group (THG) is now in.

On the day of its results for the six months to 30 June, share prices in the retail tech platform plummeted 18.4 per cent as it revealed that senior independent director Zillah Byng-Thorne of Future and non-executive director Andreas Hansson of Softbank were both stepping down from the board with immediate effect and with no explanation. They are replaced by former Cineworld finance director Dean Moore and ex-Microsoft executive Gillian Kent.

The results themselves potentially offer a reason. The company posted deeper losses, even as revenues rose due to a 22 per cent increase in cost of sales. The company cited “adverse macroeconomic conditions and a period of unusually high raw material costs”. In other words, inflation has hit THG hard.

And this tough trading environment for retail looks set to get worse before it gets better. Inflation could yet rise further, the cost of living crisis has caused consumer confidence to plummet to an all-time low, and a recession would hit businesses even harder.

To make matters bleaker for THG, the company no longer has a cushion of net cash to fall back on. Its gearing is arguably not at danger levels, but then again this is a business that has yet to make a profit and the bulk of the equity THG’s debt is secured against is intangible. Analysts are predicting that its losses will get smaller, but they still forecast that the company will be haemorrhaging money at the end of 2024. Given the current look of things, it’s hard to argue against that point.

The results make for troubling reading on their own, but are even more worrying in the context of the news in July that Softbank’s plans to acquire a fifth of THG’s Ingenuity technology division for $1.6bn (£1.4bn) had fallen through. THG said at the time that the decision was a “mutual agreement” made “in light of global macroeconomic conditions”, but shareholders have every right to question how mutual this decision really was. Simply a matter of bad timing or did Softbank dodge a bullet?

For those who are still holding on to this stock, we suggest taking Softbank’s approach and walking away. It’s time to cut those losses. Sell.

Last IC View: Hold, 111p, 22 Apr 2022