THG’s stock bounce appears to have been driven by news that founder and CEO Matthew Moulding has spent £5m buying back shares in the company from Japanese investor Softbank.

The shares are still trading 90% below their IPO level. But I’m wondering if this could be a turning point for THG. Should I consider adding this stock to my portfolio as a recovery play?

The Covid boost is over

THG is on track to report revenue of £2.4bn this year, making it a decent-sized retailer. But while sales rose by 35% in 2021, this year has been slower. The group’s revenue rose by just 8.8% during the first nine months of 2022.

Even this figure was helped by the acquisitions of Cult Beauty and Bentley Labs. Unfortunately, THG’s reporting doesn’t specify how much of its sales have come from acquisitions during the year. However, my guess is that sales would have been broadly flat so far in 2022 without the bought-in growth.

This makes me wonder whether growth at core brands such as Lookfantastic and Myprotein may have peaked.

I’m also a little worried about THG’s ongoing losses. THG is expected to report a pre-tax loss of around £175m this year. Broker forecasts suggest the company will remain loss making until at least 2024.

THG expects to have £500m of cash on hand at the end of the year, so there’s no immediate risk of problems. But most of this money has come from loans that will need to be repaid at some point. At the end of June, the company reported net bank debt of £226m.

THG share price: I’m not buying

Moulding expects 2023 to be a better year. He says that lower commodity prices will allow the business to improve profit margins and cut prices to consumers. This should help to reignite sales growth. Moulding also expects to see consumers “prioritise beauty, health and wellness” despite cost-of-living pressures.

I can’t predict the future success of THG’s brands. For this reason, I’d only want to buy the shares if I thought they were really cheap. Unfortunately, I don’t think they are.

THG is loss making, so the stock doesn’t have a price to earnings ratio. However, an alternative measure I can use is the price to sales ratio.

At a share price of 57p, THG is trading on a price/sales ratio of around 0.3. For comparison, online retailer ASOS is currently valued at just 0.16 times sales, even though the fashion firm is expected to return to profit next year.

On balance, THG stock isn’t cheap enough to interest me at the moment. This business has disappointed the market this year. Although the outlook could improve in 2023, there’s no guarantee of this. I’d want to see firm evidence of improving performance before risking my own cash.

Negatives from the results

The main figure that people will jump on is the significant rise in the operating loss for the six months. It was £89.2m, wider than a loss of £17.4m in H1 2021. Given that group revenue was actually up by 12.3% for this period, the hit didn’t come from lower customer demand.

Rather, the business specified a few points that contributed to the loss. It mentioned increased administration costs, relating to headcount, governance and marketing. The firm also said the loss was reflecting its “consumer price protection investment strategy“. This sounded like corporate jargon to me, so I dug a little deeper.

What this refers to is the fact that like many other businesses, THG is experiencing cost inflation. Rather than pass this fully on to customers, it’s trying to absorb some of it. This naturally reduces the gross profit margin, which I noted had fallen by 4.4%. In doing this, THG calls it a price protection strategy for customers.

The impact of all of the above means that the net debt/cash position deteriorated from a positive number of £384.6m in H1 2021 to a negative figure of £225.6m now.

The fall in THG share price

The market clearly took the results badly, with the sharp move lower seen immediately. This compounds the 92% fall over the past year. To a certain extent, I think that some investors who have been holding the stock for a while have decided that now is the time to throw in the towel.

I think this is exacerbating the move lower today, as I don’t feel that the results and outlook are actually that dreadful. For example, the company said the issues relating to higher costs tie in with “elevated commodity pricing, foreign exchange headwinds and wider inflation following on from Covid-19 impact and subsequently the war in Ukraine.”

These are all temporary problems. Sure, I don’t expect any to be resolved tomorrow. But if the business can ride out the next year or so, I don’t see all of these factors still being a headache.

This leads me to the flipside, revenue. The business had a record revenue performance of £1.1bn. Both the Beauty and Ingenuity division had growth of over 20%. Clearly, there’s demand for the products and services offered.

Despite my reasoning here, I still won’t be investing. Even though I think it’s a good business, I think the issues over the past couple of years mean that investors will be incredibly sceptical about buying the stock. I’ll invest in the business at some point, but as can be seen from the reaction today, I don’t think now is the right time.

The stock’s downfall was kickstarted in September 2021. The company reported a devastating operating loss of £17.4m in its half-year report. This clearly pushed many investors to jump ship. 

With a tremendous fall in share price, I’d be tempted to add cheap THG shares to my portfolio. But I’m not confident that The Hut Group can recover from this complete plummet. Let’s take a look.

Ingenuity or ignorance?

The online retailer develops brands’ digital presence. It does so through its prized Ingenuity platform, which now hosts a total 187 websites. Alongside this, the company generates other revenues through its THG Beauty and Nutrition retail. 

A diverse income is definitely an attractive aspect of any company’s operation. Indeed, during the lockdown period, The Hut Group expanded both its own brands and its B2C service as online sales shot up. This led to total revenues increasing from £1.6m to £2.2m across the second quarters of FY21 and FY22. 

However, The Hut Group stated interest in separating “THG Beauty by way of a listing or strategic partnership”. This is part of management’s wider plan to divide key business units to create corporate flexibility. That said, I believe this decision is poorly timed. 

The company’s operating loss soared to £137m in its FY21 report. This figure will only worsen as the pandemic continues to fade away –  and consumers return to physical stores. This suggests The Hut Group needs to focus on its operational health, not its corporate structure. Yet managerial focus on the latter leads me to believe the THG share price is set to fall even further. 

Missed opportunity

Last month, The Hut Group announced the cancellation of its deal with Softbank. The deal offered a £900m investment opportunity, and would have placed the company’s valuation at £4.5bn. Yet the THG share price only suffered a 1% drop in share price as a result of the withdrawal. However, I believe the full implications of this are yet to surface. 

The Hut Group claimed the withdrawal was due to ‘global socioeconomic conditions’. Indeed, inflationary increases have impacted the company’s production costs.

Also, the company blamed increases in distribution costs (£43m in FY21) on the impacts of Covid-19. However, this is rather questionable given management’s crediting of increased sales revenue to the pandemic-induced lockdown. Indeed, the cancellation suggests the company lacks confidence in its ability to navigate these operational disruptions.

Considering this, it makes sense that The Hut Group decided to withdraw. But the cancellation confirms my concerns. It’s evident that the company will be unable to push operational growth in the near future. There is little hope of the company mitigating huge operating losses. Also, untimely changes to corporate structure could cause further turmoil.

This reaffirms my belief that the THG share price is set to fall even further. Because of this, I won’t be adding The Hut Group shares to my portfolio any time soon. 

Is this a potential bargain for my portfolio hiding in plain sight?

Understanding the fall

Normally if a share price collapses like that, one of the key questions I ask myself as an investor is what lies behind the fall.

When it comes to THG, several reasons explain why investors have soured on the growth story. A disastrous City presentation last October sent the shares plummeting. But I think that just made existing investor nervousness stronger.

At the heart of the price fall has been a question about how valuable THG’s business is. As well as its own online retail business, the company has a division called Ingenuity that seeks to provide digital commerce solutions to other brands. Ingenuity sounds like an interesting opportunity for a scalable platform, something that has been lucrative for firms like Shopify. But the economics and likely profitability of the division have remained hard for investors to fathom.

THG has also rubbed up some investors the wrong way with its approach to corporate governance. I do not see this as the core reason for the share price fall. Indeed the company has been improving its approach, for example, splitting the chair and chief executive roles. If the business performance was strong enough, I think such governance concerns would be less important to many investors.

Strong revenue growth

Looking at last year’s results, business performance actually does look strong to me in some ways. Revenue grew 35% to £2.2bn. Revenue growth slowed in the first quarter this year, but still stood at 16% year on year.           

Profitability is more of a concern. The company reported an operating loss of £137m last year. Net cash fell last year by almost £240m. A growth business like THG can eat up a lot of money to develop and scale its business. I think that explains its losses. I expect such costs to continue in years to come.

Should I buy THG shares?

The company announced last month that a potential bidder is mulling an offer. The deadline for such a bid expires tomorrow. That comes in the wake of THG revealing that it had recently received multiple takeover offers it had rejected as “unacceptable”. If bidders potentially see value in THG’s share price, should I?

Not necessarily. A bidder for a whole company can have different ways to unlock value than an individual shareholder.

I like the company’s business strategy and think its strong revenue growth shows that THG may be able to keep scaling its approach. But the lack of profitability concerns me. Ingenuity seems promising, but is only a small part of the overall business. Given the uncertainty such risks pose to the company’s future profit outlook, I do not see THG shares as a bargain at the moment. I will not be adding them to my portfolio.

Although the THG share price is still down by more than 80% over the last year, I’m wondering if today’s news could signal a turning point for this troubled growth stock. Should I look at buying THG shares for my portfolio?

Is bid news a buy signal?

THG has been one of the most disastrous IPOs of recent times. The company, which is led by founder Matthew Moulding, has seen its market cap fall from over £6bn to just £1bn since its IPO in September 2020.

Given this, today’s news of bid approaches seems encouraging. However, it sounds to me like these offers were always doomed to fail.

According to founder and chief executive Matthew Moulding, THG has received a number of proposals in recent months, but they have all been unacceptable, “failing to reflect the fair value of the group”.

Moulding says that all the approaches were rejected and that THG is no longer in receipt of any proposals.

My guess is that as the company’s founder, his idea of fair value is a lot higher than that of outside buyers. But who’s right? To decide, I need to learn more about THG’s numbers.

Sales up 35% in 2021

My first port of call is today’s results, which cover the 2021 calendar year. These show that THG’s sales rose by 35% to £2,180m last year. That’s in line with City forecasts and seems like fairly strong growth to me.

Unfortunately, sales growth wasn’t matched by profit growth. THG’s adjusted cash earnings (‘EBITDA’), which exclude a number of costs, rose by just 7% to £161.3m. That gives an adjusted EBITDA profit margin of 7.4%, down from 9.3% in 2020.

Worse still, this business remains loss making at an after-tax level, with a reported loss of £138m for the year just ended.

However, THG is a growth business and its losses do appear to be reducing. Will the picture improve this year?

THG shares: outlook uncertain

For me, one attraction of this business is that 80% of its sales come from repeat customers. This suggests to me that THG brands such as Myprotein and Lookfantastic have a loyal following.

In 2022, THG expects to see sales growth of between 22% and 25% as it recruits new customers. Based on this guidance, I estimate that THG shares could be trading on around 0.5 times forecast sales. That’s a similar valuation to online fashion retailer boohoo. It could be a fair price for THG.

However, one key difference between boohoo and THG is that boohoo is much more profitable.

The fashion giant is expected to report an after-tax profit of £75m this year, on £2.2bn of sales. By contrast, THG is expected to report a loss of £25m on £2.8bn of sales.

Although I’m impressed by THG’s ongoing sales growth, I’m worried about its lack of profitability. Even with sales of more than £2bn, it’s still not making any money.

In my view, there are better choices elsewhere in the online retail sector. I won’t be buying THG shares.

THG: a British e-commerce winner

After its delightful debut, the THG share price kept rising. In January 2021, the shares peaked at nearly 840p, valuing the group at £7.5bn. At this point, THG’s founder, executive chair and chief executive Matthew Moulding was a billionaire — on paper, at least. This was a lofty valuation for a business founded in 2004 to sell CDs that evolved to run nearly 200 websites selling products direct to consumers. Today, THG consists of three main divisions: health, beauty, and nutrition — selling products such as cosmetics and protein shakes online. And at the heart of THG lies its proprietary e-commerce platform: THG Ingenuity, regarded as the company’s secret crown jewel.

The THG share price plunges

Four months after floating, the THG share price peaked at an all-time high of 837.8p on 12 January 2021. That’s a gain of over two-thirds (+67.6%) since listing. Alas, over the past six months, it’s been all downhill for this growth stock. On 7 September 2021, the THG share price closed at 684p, still 36.8% above its float price. But then the shares plunged brutally, losing nearly 60% of their value in just five weeks.

By 14 October, THG stock was trading at a mere 281.4p. Reviewing this collapse on that day, I said, “there are too many red flags around this business…THG shares are far too risky for my blood”. My misgivings proved to be spot on, as the THG share price plunged further still. On 2 November, I again turned down the opportunity to buy THG at 201.09p. And earlier this year, on 31 January, I again gave this stock the thumbs-down at a price of 126.5p. But I did suggest that “I’d be tempted to buy at around £1”.

Are THG shares in the bargain bin?

On Wednesday, the THG share price closed at 86.7p, valuing the firm at £1.06bn. Hence, THG has lost almost nine-tenths (-89.7%) of its market value in 14 months. That’s a disaster for THG shareholders and the London Stock Exchange. But after such a cataclysmic collapse, are THG shares a bargain today?

Though I’m a veteran value investor at heart, I do make the occasional speculative punt on beaten-down shares. And interesting things are happening inside THG right now. First, Matt Moulding is planning to end THG’s dual-share structure that delivers him overall control of the business. Second, Moulding has given up the chair of THG to Charles Allen, a City veteran appointed as a non-executive, independent chairman. Third, the company is undergoing rapid internal restructuring in order to boost growth. Fourth, tech investor Softbank invested $730m in THG in May 2021 at a share price of 596p. This gave it an option to buy 19.9% of THG Ingenuity for $1.6bn within 15 months. Today, the Japanese tech giant could buy all of THG for just over £1bn.

To sum up, I don’t own THG shares and I won’t buy today. But I will bring THG to the attention of a few growth investors I know who prefer high-risk stocks!

The THG share price soars and then slumps

Founded in 2004 to sell CDs, Manchester-based THG runs nearly 200 websites selling direct to consumers via its custom e-commerce platform. Its three main divisions (health, beauty and nutrition) sell products such as cosmetics and protein shakes. When THG floated in London on 16 September 2020, it priced its shares at 500p, valuing the business at £4.5bn and raising £1.9bn for the company and its owners. At its first-day peak, the THG share price leapt to 658p (+31.6%), before closing at 625p (+25%). This valued the group at £5.6bn.

But THG’s share price kept rising, driven higher partly by belief that THG Ingenuity — its proprietary e-commerce technology — was a hidden gem. Eventually, THG stock hit a record high of 837.8p on 12 January 2021. With the stock up 67.6% since listing, THG’s founder, executive chair and chief executive Matthew Moulding became a paper billionaire. Nice.

Over the next eight months, the share price drifted downwards, closing at 684p on 7 September 2021. Unfortunately, it was brutally downhill from there for THG’s shareholders as the stock plunged repeatedly. In five weeks, the shares lost almost 60% of their value. When I wrote about THG on 14 October, it had collapsed to 281.4p, crashing 57.7% in under five weeks. This followed a disastrous investor presentation on 12 October, when rash remarks by Moulding sent the stock southwards.

THG keeps on falling

On Friday, the THG share price closed at 126.5p, roughly a quarter (25.3%) of its 500p IPO price.  This valued the business at just £1.54bn. Also, the stock hit an all-time low of 118.3p on 24 January, before recovering to close at 121.3p. Obviously, this has been a catastrophic 12 months for the group — and partly for the reputation of the London Stock Exchange. Alas, the shares weren’t helped by an uninspiring trading update and profit warning on 18 January. Here’s how this stock has performed over five time periods: One day: -7.1% | Five days: -14.5% | One month: -44.8% | Six months: -78.2% | One year: -82.9%.

So far, nothing has stopped the ongoing decline in the THG share price. But THG’s sales growth is very robust, so it might well grow its way out of its current troubles, despite declining margins. Also, the group has the backing of a major investor: Japanese tech giant SoftBank. SoftBank invested $730m in THG in May at a share price of 596p, giving it an option to buy 19.9% of THG Ingenuity for $1.6bn within 15 months. Conceivably, Softback might bid for the whole group, plus THG has plans to spin off its dominant beauty business in a separate London listing this year.

I don’t own THG shares today, but I wouldn’t buy them at the current price. However, if the share price keeps falling, then I’d be tempted to buy at around £1. After all, boss Matt Moulding might decide to take his baby private again by offering a price premium to current shareholders. And almost anything can happen when formerly high-flying shares are cast into the bargain bin!

Could this be a buying opportunity for my portfolio?

Strong revenue growth

The stock in question is THG (LSE: THG), previously known as The Hut Group. The THG share price has collapsed since its flotation in September 2020.

When the company initially came to the stock market, investor enthusiasm seemed high. THG runs over 180 retail websites in areas such as beauty and nutrition. It also offers online sales and fulfilment services to other businesses through its Ingenuity division. But things soon turned sour, with growing concerns in the financial community about the long-term prospects for Ingenuity.

This month the company reported that revenue for the past year grew by 35%. The Ingenuity business grew even more strongly, posting a 41.4% increase in revenue to £194m. Such growth rates look impressive to me. So, why has the THG share fallen so far?

Disappointment and uncertainty

Although the revenue growth was strong, its most recent trading update contained news that disappointed investors too. The company said that its adjusted earnings before interest, tax, depreciation and amortisation would come in lower than the market expected. It pinned that shortfall on movements in exchange rates.

The company forecast revenue growth this year of 22%-25% but warned that high commodity prices are a concern. There is a risk they could hurt the profit margins of some of the company’s direct product sales.

As well as that news, investors are struggling to figure out how profitable the company’s business model might end up being. In its first half, THG recorded an operating loss after adjusted items of £17m. On top of that, the company rents quite a few properties from its founder. That sort of arrangement is not common among large listed companies. I see it as a potential distraction for the founder from the core task of running the company.

I will pass on this UK growth share

I am in two minds about the future prospects for the THG share price. The company’s fast rates of revenue growth look attractive to me. I think there is quite a lot that it seems to be doing well, from gaining customer traction online to improving sales in Ingenuity. In the long term, that could be good news for both revenues and profits. If the company proves its business model, today’s market capitalisation of £1.6bn could come to seem cheap.

On the other hand, I continue to feel that the business is overly complicated. Its unconventional approach to corporate governance issues and the lack of detail on Ingenuity’s profitability do not inspire confidence in me as a potential shareholder. THG might still do very well. But I continue to find it difficult to establish clear expectations for the company’s financial performance in the coming years. For that reason, I will not be buying it for my portfolio.

The headline figures in the report look impressive. Fourth-quarter revenues jumped 27% compared to Q4 2020. Acquisitions helped boost sales as well as organic growth. Overall, the group’s sales hit £2.2bn for 2021 as a whole, up nearly 38% year-on-year and 95% compared to 2019 levels. 

However, it looks as if the business is suffering from the inflationary pressures that are biting across the retail sector. The company is warning full-year profit margins will be lower than expected. It is now forecasting margins of 7.4% to 7.7% compared to the 7.9% previously expected. Management expects these strains to last until at least the second half of 2022. 

Market sentiment 

I think this downbeat outlook explains why the market is punishing the THG share price today. The company was already facing a lot of pressure heading into these results. It has been fighting off concerns about its corporate governance structure, growth outlook, and accounting standards over the past couple of months. Falling margins are just the latest headwind facing the business, although these are mostly out of its control. The entire economy is having to deal with the challenge of rising prices. Some businesses can pass these price rises on to consumers. Others are struggling. 

As the firm’s update explains, these pressures are likely to remain an issue for the group for at least the next year.

Nevertheless, I think THG is better placed than many of its peers to navigate the uncertainty. The company has been built from the ground up using technology, and can use technology to reduce costs and improve efficiency. 

The enterprise has also invested heavily in infrastructure over the past 12 months. It has spent £1bn building its order fulfilment technology, suggesting that the business has the infrastructure needed to meet rising order volumes and capitalise on the booming e-commerce market. 

THG share price pressure 

Despite its competitive advantages, the company is struggling to rebuild confidence in the City. Analysts are incredibly sceptical about THG’s prospects. The latest warning about profit margins has not helped improve sentiment. 

That being said, I think the market is overreacting following today’s release. Sales growth of 38% year-on-year is incredibly impressive. What’s more, as I have tried to highlight above, every single retailer is having to deal with rising prices, so it seems strange that THG should be overly punished for something the rest of the industry also has to grapple with. 

I think today’s decline is more of a reflection of general investor sentiment towards the business. The market seems to be looking for any reason to sell the stock. 

For long-term investors, this could be an opportunity. In theory, equity prices should track underlying business performance in the long run, suggesting that if sales continue to expand, the THG share price should follow suit. And with that being in the case, I would be happy to buy the stock for my portfolio as a speculative investment today. 

Is the market repricing the growth opportunities on offer at THG? Let’s take a closer look to see if the stock is a buy for my portfolio.

The bull case

As a quick recap, THG is an online retailer of its own and third-party brands. The company also provides an end-to-end e-commerce solution for consumer brand owners under its THG Ingenuity division.

THG Ingenuity is crucial for the company’s future growth prospects in my view. In fact, Japanese conglomerate Softbank entered a collaborative agreement with THG in May that saw it invest $730m in the shares. What’s more, Softbank has an option to acquire a 19.9% stake in THG Ingenuity for $1.6bn, provided it’s separated from the main group into a THG-owned subsidiary. There’s also potential to leverage Softbank’s connections across its portfolio companies to grow Ingenuity further.

The most recent interim results to 30 June showed impressive year-on-year revenue growth of 41.9%. In particular, THG Ingenuity revenue grew by 39.7%, which is important given the prospect of the Softbank deal. City analysts also expect group revenue to increase by 26% in 2022, which is still strong growth.

The bear case

There have been governance risks with THG in the past that I wrote about here. I’d have to be comfortable with these issues before buying any shares.

But it’s the cash flow that I’m concerned about today. The company is highly acquisitive, and also has major capital expenditure (capex). THG had capex of £239m during 2020, with a further £112m spent on acquiring businesses. There have been a further eight acquisitions in the six months ending June 2021. This suggests to me that THG is a capital-intensive business. As the company remains loss-making, it’s had to raise capital from debt and equity issuance to pay for these investments. There’s a high chance of further share and debt issuances going forward, which heightens the risk for shareholders.

It’s hard for me to understand the potential with THG Ingenuity because the company doesn’t separate out its profit margins and cash flow from the other divisions. It may be that it’ll be a capital-light and highly cash-generative business in the future. But today, I can’t determine if this will definitely be the case.

Is THG stock a buy?

With so much riding on the success of THG Ingenuity, I’d have to be confident of its success. It clearly has potential given the interest from Softbank. If it does take up the option to acquire the 19.9% stake in Ingenuity, I see considerably upside in the THG share price from here.

But THG doesn’t fit my preferred mould for a growth share. I like to see a capital-light company that can reinvest in the business with its own generated profits. Right now, THG requires considerable external capital to grow, which means I won’t be buying the shares today.