THG has been reduced to a ‘penny stock’ after a collapse in its share price. Now it has slashed its forecasts for the year to December. Can its strategy of increasing prices “slower and lower” than rising inflation rescue the company’s prospects? Analysts are divided.
The share price of THG [THG], formerly known as The Hut Group, has fallen to record lows in the wake of half-year losses and reports that two directors have resigned from the board. The stock has declined 83.8% year-to-date, closing at 37.15p on 27 September.
On 15 September, the company announced that senior independent director Zillah Byng-Thorne and non-executive director Andreas Hansson were to step down. Dean Moore, a former finance director at Cineworld [CINE.L], and Gillian Kent, previously of Microsoft [MSFT], are to join the board as non-executive directors.
That same day, THG released its results for the six months ending June. Despite record half-year revenues of £1.1bn, the company recorded an operating loss of £89.2m. It attributes these losses to investments designed to shield consumers from unusually high raw material costs, part of its customer retention strategy. Net debt was £226m, while adjusted earnings of £32.3m were below the £48m predicted by a consensus of analysts at Visible Alpha, according to the Financial Times.
THG lowers full-year profit guidance
The Manchester-based company lowered sales and profit forecasts for the year in its interim results. It now expects sales growth of 10-15% for the year ended December, and adjusted earnings of £100-130m. This is down from previous forecasts of 19-24% and £161m, more in line with 2021. In the past 10 days, THG shares are down 13.8%, closing below 40p for the first time on 23 September.
THG’s share price has declined since its IPO two years ago when its shares floated at 500p each, giving it a valuation of $5.4bn. Its market cap has decreased to $521m since then as its shares value falls by more than 90%.
Adding to a challenging time for THG’s financials, in July a $1.6bn deal for Japan’s Softbank [9984.T] to acquire one-fifth of THG’s Ingenuity technology division was placed permanently on hold.
As living costs rise and shoppers rein in spending, discretionary spending in areas like health and beauty may well shrink. However, there may still be grounds for optimism. The September results outline plans to raise prices “slower and lower than inflation”, as part of ongoing measures to prioritise what Moulding calls a “loyal customer base” above shorter-term margins. Moulding states that the company aims to be cashflow positive in 2024.
Analyst forecasts for THG are mixed
While investors will hope the customer retention strategy pays off, some analysts appear less confident about the prospects for the THG share price.
After the recent results, Liberum Capital analysts downgraded the THG stock recommendation from ‘buy’ to ‘hold’, with analysts dramatically lowering their 12-month target price to 45p from 380p. Liberum explained that “we have clearly gotten this call wrong... as although the shares are down 94% year-over-year, we struggle to see upside in the near term,” citing the company’s debt among the reasons.
However, other analysts are more positive about the prospects for THG to recover. The four analysts offering recommendations to MarketBeat rate the stock a consensus ‘moderate buy’ as of 28 September. Their median price target of 391.75p is over 10 times the value of the latest close. Indeed, even the downside target of 150p would represent an increase of over 300% from 28 September.
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