THG shares fall by 22% as half-year results disappoint

THG shares (LON: THG) fell by 22% to 69p on Thursday as the beauty and lifestyle websites operator delivered weaker-than-expected half-year results. The company, formerly known as The Hut Group, has fallen a long way from its September 2020 IPO — when shares soared by 30% on the first day of trading to 646p within a couple of hours on the market.

Remember, past performance is not an indicator of future returns.

THG shares: half-year results

Group revenue fell by 9.3% year-over-year to £969.3 million, ‘driven by the strategic exit of non-core divisions and discontinued categories, short-term volume reductions within THG Beauty manufacturing, the previously stated de-emphasis in certain beauty markets and the proactive pivoting of the THG.’

However, adjusted EBITDA increased to £47.1 million from £32.3 million in H1 2022, partially due to losses on discontinued products reducing from £8.5 million to £3.1 million as a result of the company’s ongoing strategic review.

Operating losses came in at £99.5 million, £10.3 million more than in the same half last year. Again, the company highlighted the impact of a £26.2 million one-off charge that came with disposing of non-core assets and loss-making discontinued categories.

Positively, cash generation over the past year has been stronger, and the company maintains a relatively strong balance sheet, with cash on hand of £392.5 million and an undrawn £170 million revolving credit facility at the end of the reporting period.

However, active customers in key segments THG Beauty and THG Nutrition fell by 10% and 5% respectively.

Where next for THG shares?

THG has run into a plethora of troubles over the past couple of years. CEO Matt Moulding — who has publicly lamented the IPO as a ‘mistake’ — has given up his golden share which blocks takeover attempts. The company rejected an approach by Apollo Global Management in May, arguing it had ‘no merit’ due to ‘inadequate valuations and the nature of those offer structures.’

The price of whey, a key ingredient in its protein shakes, has rocketed. However, the nutrition business did still enjoy record first-half revenues of £340.7m, with adjusted EBITDA of £47.1m, up 71.9%.

Conversely, the key Ingenuity division, which helps other retailers sell online, has come under heavy speculation over future profitability — with revenue falling by nearly 15%. On the other hand, there were some key client wins in the half, including L'Oréal US prestige brands, having listed in the Gartner's Magic Quadrant for Digital Commerce.

Moulding notes that ‘Inflationary pressures provided significant challenges to consumers and businesses alike over the past 18 months. Our strategy of supporting our consumers through 2022, sacrificing margins in the short-term, is bearing fruit. This is reflected in the strong H1 results we've posted today, across adjusted EBITDA and cash.’

Looking forward, the company advises that ‘Q3 revenue exit momentum gives us confidence in full year continuing revenue growth of 0% to -5%.’ While this would represent an improvement from the revenue fall in H1 2023, growth is perhaps not the right word to use — particularly when the company was previously forecasting a low-to-mid-single digit increase.

THG does anticipate Q3 continuing revenue to be ‘marginally ahead of Q2’ and the board still expects to see ‘FY 2023 Group Adjusted EBITDA in line with the company consensus.’ Encouragingly, it’s expecting to enjoy free cash flow breakeven for FY 2023 as a whole.

Longer-term, THG is still planning to move to the premium segment of the London Stock Exchange and is still facing pressure from several activist investors. Arguably, Moulding’s turnaround strategy is now at a precarious stage, which could nevertheless bear fruit.

Given the share price reaction, value investors may be tempted to buy the dip — but this hasn't been the first dip this year.