Another year, another disappointment from THG PLC (LSE:THG), the e-commerce group that floated in London to great fanfare back in September 2020.
It floated at 500p a share, which gave it a market capitalisation of £4.5bn. Today’s disappointing update, which saw the retail group warn that margins this year would be between 7.4% and 7.7% rather than the 7.9% the market had been expecting, prompted another bout of selling in the stock, which now trades at 169.2p, giving it a valuation of £2.3bn.
READ THG shares fall again despite sales growth forecast
How did we get from there to here?
First, let’s address why THG, formerly known as The Hut Group, was valued so highly when it listed.
Although characterised as a retailer focused on beauty and nutrition products, the “secret sauce” for THG was Ingenuity, its end-to-end e-commerce platform that was supposed to prove irresistibly attractive to companies that have blockbuster brands.
The City of London, smarting from its inability to attract genuine world-beaters in the field of technology – there is Ocado Group PLC (LSE:OCDO) and not much else these days – was keen to buy into THG’s story that it was set to be an e-commerce titan.
The London Stock Exchange even allowed founder Matthew Moulding to retain a “founder’s share” that would allow him to block unwanted turnovers, as it had done with the founder of Deliveroo.
Some observers carped that annual revenue from the Ingenuity division at the time of flotation was just £61.4mln, which is not a sum that is going to cause Amazon.com, eBay or Shopify (TSX:SH., NYSE:SHOP) sleepless nights.
Revenues from the group as a whole clocked in at £1.14bn in 2019, up from £80mln in 2010, while profits were around £111mln, meaning the company was valued on 40 times annual earnings. An earnings multiple of that magnitude elicits suspicion in some investors and enthusiasm in others.
For a while at least the enthusiasts held sway with the shares rising more than 50% in the two months following the initial public offering. Moulding’s incentive scheme reportedly included a target to achieve a 50% increase within three years (from which he would trouser £700mln); the shares had hit that target within three months, never mind three years.
I didn't get where I am today by being conventional
Here was a company that looked like it might give the US technology companies – typically run by megalomaniacs indulging in shall we say dubious business practices – a run for their money.
In its early days, The Hut Group specialised in selling CDs (compact discs) online from Guernsey taking advantage of a tax loophole so obvious that even former Chancellor of the Exchequer George Osborne noticed it, despite Moulding being a major donor to the Conservative Party.
THG even had a bit of form in terms of overvaluing its shares. In 2011 it acquired the sports brand Myprotein for £58mln from its founder, Oliver Nobahar-Cookson. The consideration comprised £30mln in cash and a slug of shares said to be worth £28mln.
According to The Guardian newspaper, in 2014, a high court judge ruled that THG hid losses that might have undermined the value of the shares and ordered THG to pay Nobahar-Cookson £10.8mln to settle a fraud claim. There was no suggestion that Moulding had any knowledge of the fraud.
There was a bit of a bad smell, however, around Moulding using money raised from selling shares in the flotation to buy property from THG that he then leased back to the company for £19mln a year.
On the other hand, Moulding plus co-founder and chief financial officer John Gallemore have both pledged to donate their annual salaries to charity. Moulding has also indicated he would donate any profits from his property interests to charity.
Shareholder advisory consultancy Pirc criticised the arrangement saying Moulding’s ownership of buildings used by THG could deter the company from negotiating down rental increases.
THG said the leasing arrangement was an “arm's length” one, with the company not obliged to renew its leases on the properties.
Notwithstanding all of the above, the City was prepared to hold its nose and back the company so long as the high-growth, technology-fuelled proposition remained credible.
The curtain is torn aside
A bit like the scene in The Wizard of Oz when the dog Toto rips a curtain aside to reveal the scary-voiced wizard is just some old bloke twiddling knobs on a sound system that amplifies his voice, credibility disappeared almost in the blink of an eye.
In mid-October 2021, the company held a “capital markets event” focusing on its end-to-end technology platform, Ingenuity.
“No material new information will be disclosed today,” the company revealed when it announced the event and that might have been the problem.
The City, having paid top dollar (top pound?) for the shares was keen for news of new customers signing up to Ingenuity. News of heavyweight brands flocking to Ingenuity has been thin on the ground.
In a single day, the shares lost a third of their value. The curtain had been ripped aside.
Moulding tried to appease the City by agreeing to dispense with his golden share and to fall into line with City practice by relinquishing the role of chair of the company while remaining its chief executive.
That was enough to persuade fund manager Blackrock, to halve its stake in the company in November 2021.
Investors started to wonder and worry. If Blackrock was getting cold feet about the company, what about Softbank, the Japanese investment goliath that has an option to buy 20% of Ingenuity for US$1.6bn?
Softbank was the company that persuaded the City to sell out ARM Holdings, one of Britain’s genuine technology titans, for what in retrospect looks like a few beans so it has an eye for a bargain.
What if it decides Ingenuity is not worth the candle? The share price would most likely collapse and Moulding would perhaps be ruing his decision to give up his golden share although he has hinted in media interviews that he regrets taking the company public so going private may still be an option.