THG shares hit as e-commerce group warns of profit margins

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Shares of British e-commerce group THG took another hit on Tuesday after the company warned that revenue growth and profit margins would miss expectations.

THG, hailed as a rare British tech success when it introduced in 2020, said margins before interest, tax, depreciation and amortization would be 7.4-7.7% for 2021, below analysts’ expectations. around 7.9% and below historical margins of above 9 percent.

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

Higher freight and labor costs as well as integration costs from acquisitions in the beauty business – which the group plans to sell separately or sell off – also contributed.

THG said margins are expected to recover this year and into 2023 as commodity prices decline and technology division Ingenuity – which has much higher margins than the two main e-commerce businesses – accounts for greater share of group revenue.

He also said sales growth for 2022 would be 22-25% compared to market consensus of 26%. Asked about the potential impact of squeezed household incomes, co-founder and chief executive Matthew Molding said the company has always 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 baskets of around £45.

The company, formerly known as The Hut Group, has struggled to regain investor confidence after a dramatic drop in the share price in the final months of 2021. The stock fell 9% to 169p in early trading Tuesday, 66 percent. cent below its listing price of 500p.

Market skepticism has centered on Ingenuity, which provides technology and services to brands looking to sell directly to consumers online. An option agreement to sell a stake in the division to SoftBank has led to closer scrutiny of its growth and profitability.

THG recalled that Ingenuity Commerce, the end-to-end package with the highest margins in the division, is expected to generate sales of £108-112m in 2022, compared to £45.4m in 2021 .

THG co-founder John Gallemore said around 85% of that revenue came from existing or pending deals, like the one with value retailer Matalan announced last month, and the group was “super confident” that would be achieved.

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

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

THG tried to halt its share price decline by providing more information and guidance on Ingenuity and pledging to appoint more independent directors, while Molding promised to end a defense against a takeover of “special actions” earlier than expected.

The group’s annual sales were £2.2bn, up 27% on last year, and would have been around £2bn had it not been for the acquisitions made during the year. year. When it went public in September 2020, THG forecast 2021 revenue of £1.75 billion.

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