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Online beauty and nutrition retailer and brand owner THG has reported a £496m annual operating loss as its margins were slashed by a reluctance to pass on inflationary price increases and investment in customer retention.
Group revenues for 2022 increased 2.7% to £2.24bn, representing two-year total sales growth of 38.8%.
International sales accounted for 57% of total group revenue, with the US continuing to grow strongly at 9.9% following the integrations of US beauty acquisitions in 2021, alongside the continued focus of the nutrition business.
The UK delivered sales growth in excess of the group growth rate, reflecting continued consumer demand in one of the group’s core markets.
Segmentally, THG Beauty sales grew 4.5% to £1.2bn, THG Nutrition grew 2.4% to £675m and THG Ingenuity delivered 9.1% growth in external revenue to £160m.
It said returning beauty and nutrition customers generated over 82% of DTC group revenues, which THG said “reinforces the repeat nature of our digital brands, Ingenuity’s frictionless retailing environment and the enduring nature of consumer channel shift to online”.
However, gross profit margin fell back to 41.3% from 44.7%, primarily reflecting its strategy to partially shield consumers from adverse macroeconomic conditions and a period of unusually high raw material costs (principally whey).
It said this investment drove customer retention (over 16 million active Beauty and Nutrition customers), which it said will underpin future growth.
Increased administrative costs, up to £973m from £662m, reflect temporary investment in headcount primarily following the acquisitions made in the prior year, governance costs, and industry-wide marketing cost per click inflation.
Group headcount was subsequently resized by 2,000, with the cost benefit realised into FY 2023, while automation, strong cost control and efficiencies across the group’s global warehouse and fulfilment network delivered a 110bps distribution cost reduction.
The reduced profitability saw adjusted EBITDA slump to £64.1m from £161.3m in 2021, while it fell to an operating loss of £495.6m, impacted by the non-cash impairment of £275.4m.
Also issuing a Q1 trading update this morning, THG said it has had “a positive start to the year” despite negative sales growth in the period, which it said was largely planned as a result of prioritising higher margin sales.
Group revenues were down 8.6% to £469.4m and down 5.6% to £457.4m on a continuing basis.
However, it said a significantly improving exit rate will support the group’s expectations of core divisional growth each quarter for the remainder of the year.
Meanwhile, ongoing input cost deflation and the annualisation of cost action undertaken resulted in profitability improvement, providing a strong base for further margin improvement.
Commenting on THG’s performance, CEO Matthew Moulding said: “We continue to make good progress on executing our strategy of building a leading digital-first consumer brands group, powered by our own technology and global fulfilment operations.
“While FY 2022 adjusted EBITDA was not where we planned at the start of the year, this was largely the result of our strategy to minimise the impact of inflation upon our customer base. This investment in their retention, and longer-term growth, was the principle driver behind the reduction in gross margin.
“The challenging macro and inflationary environment required decisive action across the business with around £100m of efficiency savings delivered. A much-improved outlook on many key cost inputs gives us confidence in an improved financial performance as the year progresses.
“We have the technology infrastructure and the global fulfilment capability which, coupled with our continuous engagement with our millions of customers worldwide who love the high-quality products we present to them, leaves us well positioned to capitalise on this path of growth.”
Yesterday THG confirmed it had been approached by private equity giant Apollo Global Management over a possible deal.
There was no mention of Apollo’s approach in this morning’s release and THG has not released any detail about it.
THG shares have fallen back 6.9% this morning to 89.1p after yesterday’s surge on the takeover approach.
Morning update
The FTSE 100 has opened up 0.3% to 7,899.3pts this morning.
Early risers include Science in Sport, up 5.6% to 9.5p, Nichols, up 2.7% to 1,137p and Virgin Wines, up 2.6% to 40p.
Along with THG, fallers include Bakkavor, down 1.3% to 94.2p, Deliveroo, down 0.9% to 100.1p and Ocado, down 0.8% to 517.6p.
Yesterday in the City
The FTSE 100 opened the week edging 0.1% higher to 7,879.5pts yesterday.
THG was the big City story, with its shares closing up 44.9% to 95.8p after it made public the approach from Apollo.
Elsewhere, risers included Kerry Group, up 4.6% to €98.05, Just Eat Takeaway.com, up 2.9% to 1,395p, Hotel Chocolat, up 2.9% to 180p, Naked Wines, up 2.7% to 96.5p, Bakkavor, up 2.6% to 95.4p and Ocado, up 2.4% to 522p.
Fallers included Nichols, down 2.9% to 1,107.5p, Greencore, down 1.7% to 79.9p, Virgin Wines, down 1.3% to 39p, C&C Group, down 1% to 154.2p and Finsbury Food Group, down 1% to 99p.
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