The Hut Group IPO: everything you need to know

What is The Hut Group?

The Hut Group is an online retailer that sells its own beauty and nutrition products, as well as luxury goods, and that of other well known brands. Its vertically integrated model means it has the ability to deal with everything from product design and manufacturing to online sales and logistics in-house, underpinned by its ‘all-in-one growth platform’ named Ingenuity.

This means it is much more than a retailer but a tech company and service provider that licenses out its ecommerce platform and other services like data analytics and product development to thousands of other brands from around the world.

The fact it owns critical infrastructure, including factories, distribution sites and data centres, means it can provide a complete turnkey service to beauty, health, wellness and luxury goods companies that are looking to quickly establish a direct-to-consumer channel online. The Hut Group says it can provide ‘everything a brand needs to go global’, making it an integral partner for those that need to establish their brand online quickly and efficiently.

The Hut Group produces over half of all its own beauty products, which includes skincare brand ESPA and the Illamasqua make-up range, and 80% of its flagship nutrition supplement Myprotein from four production sites: two in the UK, one in Poland and another in the US. This allows it to be more agile when it comes to launching new products into the market, driven by the insights it gets from the millions of people that visit its own websites, as well as the hundreds of third-party websites that are powered by Ingenuity.

The Hut Group has four divisions: Beauty, Nutrition, Ingenuity and Other.

Beauty

The Hut Group has seven beauty brands that span skincare, haircare and cosmetics, but it also sells 850 third-party brands through its websites like Lookfantastic and Skinstore. It also provides beauty subscription boxes such as Glossybox to over 445,000 monthly subscribers, which it uses as a way to attract new customers to its websites and drive online sales.

Lookfantastic is one of the leading beauty retailers in Europe and, combined with its other websites, The Hut Group says it was ‘the world’s largest online pure-play prestige beauty specialty retailer in 2019’ based on revenue.

Beauty was the biggest contributor to revenue last year, amounting to £478.3 million. Revenue has grown at a compound annual growth rate (CAGR) of 40% between 2010, when it bought Lookfantastic, and 2019.

The UK is its largest market, but it has already successfully launched in multiple international markets, with 64% of revenue now coming from elsewhere. It has continued to deliver strong double-digit growth in its mature markets like the UK, Germany and Italy, and is delivering even faster growth in Asia, with sales in Japan and Thailand more than doubling last year.

Nutrition

The Hut Group has a range of nutrition products like vitamins and protein powders, bars and snacks. This is led by its flagship brand Myprotein, and supplemented by a family of sub-brands Myvegan, Myvitamins and MP Clothing.

The Hut Group says Myprotein was the ‘largest online direct-to-consumer sports nutrition brand globally in 2019’. The brand was making just £20 million in annual sales when it was acquired back in 2011, but it has grown into a leading brand that generated over £380 million in sales last year. The sub-brands were launched in late 2018 and are designed to broaden the appeal and audience of its products.

Like the Beauty segment, Myprotein and its other brands are more established in the UK and Europe but still growing fast, while Asia represents the bigger opportunity over the long term. It specifically caters for the tastes and cultures of individual markets, bolstered by the fact it has the capabilities to cater to local tastes, utilise its own translation services and produce locally relevant content to drive sales. Nutrition was the second biggest contributor to revenue in 2019, generating £412.9 million.

Ingenuity

At the heart of the business is Ingenuity, which operates over 200 retail websites in 60 different languages – demonstrating its ability to launch brands online around the world and overcome localised issues. These sites generate over £1 billion in sales for The Hut Group and its clients each year.

The main attraction of Ingenuity to other brands and businesses is that it provides an end-to-end service, or what The Hut Group describes as a ‘single, frictionless ecosystem’.

The company says clients usually have to use multiple service providers because its rivals don’t have end-to-end capabilities, making it a stand-out one-stop-shop. The fact it also helps with product development, marketing, data analytics, content creation and customer service means it provides much more to its clients than just an ecommerce platform.

This is why The Hut Group has attracted some of the biggest names in the business to Ingenuity. Nestle, Coca-Cola, Johnson & Johnson, PZ Cussons and Procter & Gamble are all clients. Ingenuity is not only attracting new brands looking to rapidly deploy a direct-to-consumer offering online, but expanding deals with existing clients as they launch new products or move into new territories.

It said one client initially started out with one product in a single country in April 2018 but has since expanded to nine products in 14 different countries under a ten-year deal.

Ingenuity feeds into the fact that more people are buying beauty, wellness and other consumer goods online and that brands face a stark choice – either take the risk and swallow the huge costs involved in developing their own ecommerce solution, or partner up with a company that can provide everything in a single package and rapidly deploy it.

Other

The Hut Group’s final and smallest division consists of a mismatch of other interests. This includes its other consumer goods products, including home décor and gadgets, as well as its range of luxury fashion brands like Coggles and AllSole. It also includes three properties that it runs in the UK - the Hale Country Club in Cheshire and the King Street Townhouse Hotel and Great John Street Hotel, both in Manchester.

When is The Hut Group IPO?

The Hut Group announced it intended to float on the Main Market of the London Stock Exchange under an initial public offering (IPO) on 27 August, but there is no guarantee that the listing will happen, and no firm date has been set as of yet.

A report from Sky News suggests the company is hoping 16 September will be the first day of trading for its shares.

How much will The Hut Group IPO be worth?

The Hut Group has said it intends to float ‘at least’ 20% of the business by selling new shares in the company as part of the IPO, which it hopes will raise £920 million. This suggests The Hut Group will start life as a public company with a valuation of £4.5 billion. That would easily make it the largest IPO to happen in 2020 so far, a title currently held smart-meter company Calisen.

Why is The Hut Group going public?

Only 13 companies have listed in London this year (to 27 August), less than half the number of the same period the year before. The economic uncertainty spawning from Brexit meant 2020 was never set to be a particularly good year for the IPO market even before the coronavirus pandemic gave companies another reason to delay or rethink their IPO plans.

However, The Hut Group’s business model is thriving in the current climate. Lockdown measures have encouraged more people to shop online, allowing The Hut Group, as one of the largest digital players, to poach customers from traditional retailers that don’t have strong online capabilities. In turn, those retailers and brands are now having to scurry to get themselves digitally fit, and are turning to The Hut Group to do it for them.

Data from the Office for National Statistics (ONS) says online penetration in the UK has soared to almost 32% by the end of June from less than 19% a year earlier. The company has managed to keep all of its facilities open despite various lockdown measures being imposed in its markets, meaning the impact of coronavirus has been limited thus far.

It is even confident it can continue to perform well regardless of the economic fallout from the pandemic, considering sales growth has accelerated over the first six months of this year and that the beauty and nutrition industries have proven resilient in previous recessions and downturns.

For The Hut Group, this is why it is the perfect time to raise cash, invest and expand. It can come to market with a strong proposition and it won’t have to compete for investor’s attention considering how few IPOs are in the pipeline.

The Hut Group has not provided specifics over how it intends to spend any money it raises through the IPO, but much of its rapid expansion over the last 15 years has been driven by an aggressive acquisition strategy that looks set to continue. It has said it has already identified a ‘pipeline of attractive acquisition opportunities’ that could rapidly grow under its ownership and benefit from the scale and agility of Ingenuity.

Apart from raising cash to fuel growth, the other main reason a company goes public is so existing shareholders can monetise some of their investment by selling their existing shares during the IPO, which will be sold in addition to the new shares.

This will undoubtedly include many of The Hut Group’s board, all of which have been with the company for considerable time. The two co-founders, Matthew Moulding and John Gallemore, have been at the helm throughout and their team has been with the company for at least six years, including its chief financial officer (CFO), chief technical officer (CTO) and the chief executives of the beauty and nutrition businesses.

Institutions that have backed the company early on could also look to realise the value of some their stakes as part of the IPO. This includes BlackRock Funds, Sofina and KKR.

How has The Hut Group performed?

The company is fast growing but loss making and, based on its intentions to invest and expand further, this means it will be a stock largely judged on top-line growth rather than bottom-line profits over the shorter term. Although beauty and nutrition are both the drivers of the business at present, shareholders will be focused on how The Hut Group leverages Ingenuity and its ability to prove how invaluable a service it is for big brands around the world.

The Hut Group has grown from a business that made £1 million in revenue in 2004, the year it was founded, to £1.1 billion in 2019, and this year looks set to be even better. Total revenue grew by 25% between 2018 and 2019, but that has accelerated to almost 36% in the first half (H1) of 2020. Adjusted Earnings before interest, tax, depreciation and amortisation has continued to grow at broadly the same pace as last year, up 27% in H1.

The Hut Group has largely managed to maintain steady profitability whilst generating significant top-line growth. Its gross profit margin has remained between 44% to 46% since 2018, while its adjusted ebitda margin has hovered between 9% to 10%. However, the company is still reporting losses at the bottom line.

The Hut Group is aiming to deliver revenue growth of 20% to 25% over the medium term and for its margins to remain ‘stable’. It is targeting revenue growth of 25% from the Beauty division and 20% from Nutrition, while Ingenuity is expected to grow at a much faster pace of 40% as more companies adopt its offering.

The Hut Group: A rare tech IPO for London

Timing is a crucial for an IPO and The Hut Group is one of only companies preparing to go public during such testing times. But the company has a lot going for it. It is managing to thrive at a time when most companies are trying to survive. It is benefiting from the acceleration in online shopping, which is forcing brands to find a quick and proven way of establishing their brands online. And its diversified nature means it is capitalising on both trends.

The Hut Group IPO will be the largest of the year so far, and will provide a rare opportunity for UK investors to get their hands on a fast-growing tech company. London is not necessarily known for attracting big-name tech IPOs and most choose to list in the US, but UK-listed tech stocks have performed well throughout the crisis in 2020.

Ocado’s share price has rocketed to new highs this year as it reaps similar benefits to that of The Hut Group. Lockdown has encouraged greater adoption of online grocery shopping, much like it has for beauty and nutrition products, and should encourage more retailers to adopt Ocado’s all-in-one automated warehouse technology to cope with the shift online, much like The Hut Group’s Ingenuity platform.

Read more: How to short Ocado shares

The question for the markets will be whether The Hut Group can deliver the same type of performance once it goes public and demonstrate to the market that there is a new tech stock in town.