THG: another downgrade leaves investors in a pretty pickle

Good looks are in the eye of the beholder. Precious few investors share beauty business THG’s good opinion of itself. Back in May, the Manchester-based ecommerce group said a 170p-a-share offer significantly undervalued its prospects. On Thursday, a profit warning sent the shares down by more than a tenth to 42p. They have lost 91 per cent of their value since the IPO.

THG blamed Thursday’s cut to full-year sales and profit expectations on consumer spending pressures. But confidence had already been sapped by worries over corporate governance and its business model. Higher interest rates have burst the tech bubble, which inflated the estimated value of THG’s technology division. A much-hyped agreement for SoftBank to buy a stake in this terminated in July.

It does not help that THG’s results are difficult to unpick. Boss Matt Moulding trumpeted the group’s record sales in the first half, up by 12 per cent. But this included the contribution of several 2021 acquisitions. Analysts Numis estimates that organic second-quarter sales growth was minus 1 per cent.

Strangely, THG compared its valuation to that of Unilever and drinks company Fevertree on its analyst call. Their forward EV-to-sales ratios are nearly 10 times that of THG’s. The latter’s 0.3 times multiple does not look cheap against the similarly-valued Asos and Boohoo, which are more obvious comparators.

THG insists it has enough cash — £266mn plus an undrawn £170mn facility — to carry it through. Its debt facilities are long-dated, with a £600mn loan maturing in 2026. It hopes that it will stop burning cash next year, after a £271mn outflow in the first half. It is counting on reduced capital spending and a recovery in gross margins, as the cost of whey — used in its protein drinks — falls from its April high.

Seeing is believing. After repeated disappointments, THG needs to repair its margins and cash flow convincingly for investors to give it another look.