Privacy Crackdowns And Fierce Amazon Rivalry Will Drive Margins Down

Key Takeaways

• Rising regulatory and sustainability costs, alongside persistent input inflation, are constraining THG's margins and limiting profitability across core divisions.
  
• Increased competition and reliance on data-driven models, combined with reduced diversification post-demerger, threaten revenue growth, market share, and future earnings stability.
  
• Focus on operational efficiency, own-brand innovation, and omnichannel expansion positions THG for profitable growth, increased customer loyalty, and greater financial flexibility.

Catalysts

Operates as an online retailer in the United Kingdom, the United States, Europe, and internationally.

• Intensifying consumer privacy regulation and the phase-out of third-party cookies are set to erode digital marketing effectiveness for e-commerce companies, increasing customer acquisition costs and potentially dampening revenue growth, especially as THG becomes more reliant on data-driven D2C models and digital platforms.
  
• Heightened focus on sustainability from consumers and regulators is likely to drive up operational costs as THG adapts to more environmentally responsible supply chains, putting persistent pressure on net margins and diminishing the ability to expand profitability.
  
• Ongoing competition from global e-commerce leaders such as Amazon, as well as agile and niche D2C challengers, is expected to erode THG's market share in key segments, resulting in downward pressure on both sales volumes and pricing power, negatively impacting overall group revenue and margins.
  
• THG's core Nutrition and Beauty divisions continue to experience limited margin improvement due to intensifying cost inflation in raw materials-whey still constitutes 50 percent of cost of goods sold in core categories-and persistent pricing pressures, threatening future earnings growth even as expansion into new markets is pursued.
  
• The demerger of Ingenuity reduces diversification and leaves THG more exposed to volatility in its core consumer brands; if continued underperformance in the proprietary platform persists, high-margin external service revenues will remain elusive, undermining medium-term EBITDA targets and projected free cash flow improvements.

THG Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on THG compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming THG's revenue will grow by 1.4% annually over the next 3 years.
• The bearish analysts are not forecasting that THG will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate THG's profit margin will increase from -10.3% to the average GB Multiline Retail industry of 9.0% in 3 years.
• If THG's profit margin were to converge on the industry average, you could expect earnings to reach £165.2 million (and earnings per share of £0.15) by about September 2028, up from £-180.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 2.3x on those 2028 earnings, up from -2.1x today. This future PE is lower than the current PE for the GB Multiline Retail industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.94%, as per the Simply Wall St company report.

THG Future Earnings Per Share Growth

Risks

• Accelerating global adoption of e-commerce and digital channels, paired with the rising demand for health, wellness, and beauty products, positions THG to benefit from enduring secular trends that can drive sustained revenue growth and potentially improve long-term earnings.
  
• A strategic focus on margin expansion through operational efficiency, a leaner cost structure after the Ingenuity demerger, and a targeted shift toward higher-margin products and geographies is supporting EBITDA margin improvement and may lift net margins over time.
  
• The successful transition to a vertically integrated model and own-brand product development in both Beauty and Nutrition, along with continued investments in innovation, positions THG to capture higher value per sale, drive customer loyalty, and increase the group's profitability.
  
• Ongoing international expansion and a well-established omnichannel strategy, particularly with strong retail partnerships and brand awareness in home and overseas markets, is enabling diversification and supporting top-line revenue growth.
  
• Reduced leverage and strengthened capital structure, achieved through debt refinancing, lower gross debt, and healthy liquidity to at least 2029, provide financial flexibility for future investment, which may lead to better free cash flow and improved earnings per share.

Valuation

• The assumed bearish price target for THG is £0.24, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of THG's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £0.8, and the most bearish reporting a price target of just £0.24.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £1.8 billion, earnings will come to £165.2 million, and it would be trading on a PE ratio of 2.3x, assuming you use a discount rate of 12.9%.
• Given the current share price of £0.27, the bearish analyst price target of £0.24 is 13.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.