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THG (LSE:THG) has performed incredibly poorly since it went public in early 2021. During this period, UK stocks have lost around 93% of their market value.
Yesterday (17 September), the e-commerce company formerly known as The Hut Group announced its interim results. The market reaction was not positive and the share price has since fallen by 15%.
Should I buy on the dip? Let's find out.
Unpromising results
THG consists of three divisions:
- THG Nutrition focuses on complementary products and owns the My protein brand
- THG Beauty owns several beauty brands including Looks fantastic
- THG Ingenuity is an end-to-end e-commerce platform that offers technology solutions for retailers.
In the first half, revenues from Beauty (its largest division) rose 6.9% year-on-year to £531m. Ingenuity revenues rose 14.1% to £80.2m, but were more than offset by a 7.5% drop in sales (£299m) at its nutrition business.
Overall, this meant that group revenues rose 2.2% to £911m, as £23m of discontinued revenues were removed. Adjusted EBITDA improved 3.6% to £48.8m, translating to a margin of 5.2% (an improvement from 4.9%).
Management said its nutrition business had picked up in the third quarter (current) and expects to see growth there again. Sales of beauty products are also growing, although at a slower pace than at rivals such as London war paint.
Looking ahead to the full year, THG anticipates EBITDA to be close to “lower end” from the current consensus range (£134m-£156m). He blamed currency pressures for this.
Given the tough consumer environment, I'd say this deal is resilient rather than exciting. Still, the company posted an operating loss of £84.4m for the period.
Three becomes two?
The big news is that THG plans to spin off its Ingenuity technology platform. This interesting but loss-making division has been dragging down the group's profitability, so this could create value for shareholders (if approved).
The firm says positive cash flows from its remaining nutrition and beauty segments could support future dividends.
However, I note that Ingenuity generated £226m of its £306m in revenue from THG in the first half. Only £80m came from other sources, so there would be a lot to untangle and clarify.
Net debt also stood at £685m in June. How will it be distributed? There is still a lot of uncertainty about this.
Should I buy THG stock?
It is difficult to know whether the stock is in the bargain basement or not. In terms of price/sales (P/S), it looks very 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 in five years. Growth has been very uneven and it continues to lose money, which adds risk to the investment.
Stepping back, I also worry that their collection of brands lacks lasting advantages that protect them from competition. Some sort of “moat” is the first thing I look for in an investment, and I don’t see one here.
Personally, I get my supplements from amazon as part of my Prime membership. When I compare My proteinThere are many benefits to amazon Prime, but I don't see any compelling reason to switch channels. Home delivery? Free shipping? Flexible subscription? amazon offers all of that, and I watched AC Milan vs Liverpool last night with Prime!
All in all, I see better stocks for my portfolio.
