In August, we discussed whether THG shares could break the 110p level to the upside, concluding falling revenue was a major concern and “costs will be key in the half-year report as the top line looks to be under pressure following a poor Q1.”
On the release of the half-year report, it is evident revenue is still under pressure and costs are still a problem. THG shares were down around 16% at the time of writing on Thursday.
THG reported a decline in revenue to £969.3m in H1 2023, a 9.3% decrease compared to the same period last year. This was primarily driven by the strategic exit of non-core divisions, reductions in beauty manufacturing volumes, and a shift in focus away from certain beauty markets.
Excluding manufacturing, total sales in the UK were broadly flat for THG Beauty and THG Nutrition combined.
The reduction in beauty manufacturing volumes had a significant impact on profitability, with a £9.5m reduction in EBITDA contribution year-over-year due to the fixed cost base. Excluding manufacturing, THG Beauty saw an encouraging 60bps improvement in adjusted EBITDA margin compared to last year through effective cost management.
THG Ingenuity saw a 14.9% revenue decline and 80bps EBITDA margin reduction as it shifts focus to larger, higher quality clients. This has a longer lead time to revenue realization but will provide more sustainable long-term growth.
“Digital commerce platform THG continues to face an uphill battle to be seen as a credible business with the market,” said AJ Bell investment director Russ Mould.
“Another period of operating losses and with more moving parts than a Swiss watch, it’s no wonder that investors struggle to get their head around exactly what this company is trying to do. The word ‘adjusted’ is used 118 times in the half-year results, which says it all.
“The nutrition business looks to be improving, helped by inflationary pressures easing. It wants to build sports nutrition brand Myprotein into a global lifestyle brand – notably, this part of its business has been the focus of activist investor Kelso which has called it one of THG’s undervalued assets.
“THG seems to realise that something has to change if it is to win over the market’s favour, hence the recent disposal of two loss-making businesses. That reinvention journey needs to speed up if it wants the share price to move higher. As it stands, the latest results went down like a lead balloon with the market, the shares falling nearly 18% in the first hour of trading.”
Despite the unfavourable market reaction, there were some positives to take away from THG’s update.
THG Nutrition saw substantial improvement in profitability, with adjusted EBITDA margins increasing 560bps to 13.8%, ahead of medium-term guidance. This reflects the unwinding of high whey prices over the period.
Adjusted EBITDA increased to £47.1m, up from £32.3m last year, as the company exited loss-making businesses. Operating losses were £99.5m, including one-off charges from asset disposals.