THG: Share Correction And Index Addition Will Drive Performance Recovery

Key Takeaways

• THG's FTSE 250 Index move and demerger are set to boost liquidity and focus, enhancing revenue growth and EBITDA margins.
  
• Brand repositioning and strategic partnerships in THG Nutrition and Beauty prioritize high-margin areas, driving growth and diversifying revenue streams.
  
• Rising costs and intense promotions are challenging THG's profitability and revenue, while strategic marketing and geopolitical uncertainties create additional risks.

Catalysts

Operates as an e-commerce technology company in the United Kingdom, the United States, Europe, and internationally.

• THG's transfer to the FTSE 250 Index is expected to improve passive investment flows and liquidity, potentially enhancing the company's capital accessibility and impacting its future revenue growth positively.
  
• The successful demerger of THG Ingenuity is simplifying THG's business model, allowing sharper strategic focus on its core markets of Beauty and Nutrition, which could lead to improved EBITDA margins due to a streamlined operation.
  
• THG Nutrition’s brand repositioning and expanded offline presence, including partnerships with major retailers like Walmart and GNC, are expected to drive growth in revenues and aid in customer diversification, positively impacting future earnings.
  
• With a focus on higher-margin territories and products, THG Beauty is improving its adjusted EBITDA margins. Strategic prioritization of profitable regions and investment in omnichannel development aim to sustain revenue growth in core markets.
  
• The refinancing of long-term debt and reduction in leverage position THG for improved free cash flow generation, thereby strengthening its balance sheet, which could enhance net margin performance and support sustainable growth beyond 2025.

THG Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming THG's revenue will grow by 2.4% annually over the next 3 years.
• 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 £169.9 million (and earnings per share of £0.15) by about September 2028, up from £-180.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.9x 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 13.0x.
• 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

• The Nutrition segment faced significant challenges due to record high whey prices, which could continue to impact margins and profitability if these cost pressures persist. (Net margins)
  
• The group experienced pressure on average selling prices (ASP) as a result of elevated online promotional activity and the cycling of old branded stock, impacting revenue performance and margin recovery. (Revenue and net margins)
  
• Changes in U.S. trade policy and potential reciprocal actions create uncertainty, which may lead to unanticipated impacts on consumer demand and influence revenue growth. (Revenue)
  
• While THG Beauty performed well, there is risk in reduced activity from marketing investments in less profitable territories and products that might have short-term negative impacts on revenue growth and customer base. (Revenue and earnings)
  
• Administrative costs as a percentage of revenue increased, primarily from marketing investments, which if not managed carefully, could negatively impact net margins and cash flow. (Net margins and cash flow)

Valuation

• The analysts have a consensus price target of £0.412 for THG based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be £1.9 billion, earnings will come to £169.9 million, and it would be trading on a PE ratio of 3.9x, assuming you use a discount rate of 12.9%.
• Given the current share price of £0.27, the analyst price target of £0.41 is 33.6% higher.
• 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.