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THG confirms buyout approach, reports revenue drop for Q1
British cosmetics e-commerce company THG has confirmed that it has been approached for a “high preliminary” buyout bid, causing its shares to surge 40 percent.
The LSE-listed group, which operates third-party sites for beauty and nutritional firms including LookFantastic and Cult Beauty, said it had been approached by Apollo Group Management, which came forward with a “non-binding indicative proposal” to acquire the entire issued share capital of THG.
A regulatory filing noted that there was “no certainty” that an offer would be made.
The move comes after THG’s shares continued to take a hit over the last year, during which time it issued a string of profit warnings largely impacted by logistics difficulties and rising prices.
Operating loss takes a hit
Its challenges continued to be evident in its preliminary results for the financial year ended December 31, 2022, which was published together with its trading update for the three months ended March 31, 2023.
For FY22, THG said its revenue increased 2.7 percent to 2.239 million pounds, particularly led by its tech subsidiary THG Ingenuity, which saw a 9.1 percent revenue growth, and THG Beauty, which saw a 4.5 percent growth. While its gross margin came in at 41.3 percent, down from 44.7 percent the previous year, its adjusted EBITDA costs sat at 64.1 million pounds.
Notably, the firm’s operating loss took a significant hit in 2022, rising from 137.5 million pounds to 495.6 million pounds, while its debt also increased to 180.6 million pounds from its previous 44.4 million pounds. The group said this was impacted by costs relating to its ongoing strategic review, international delivery costs caused by the absence of traditional delivery methods and distribution costs, which rose in light of its new distribution facility.
The company further noted that its international sales accounted for 57 percent of its total revenue, with the US standing out as a “growth opportunity”, contributing an increase of 9.9 percent backed by a series of beauty acquisitions made in 2021.
Meanwhile, THG’s reduced gross profit margin of 41.3 percent, down from 44.7 percent, came as part of its strategy to “shield consumers from adverse macroeconomic conditions” and a period of “unusually high raw materials costs”.
Forecasted revenue growth for FY23
In THG’s Q1 2023 results, group revenue fell 8.6 percent to 469.4 million pounds. While Beauty and Ingenuity both saw decreases of 10.7 and 10.1 percent, respectively, THG Nutrition welcomed a 4.5 percent growth to 167.9 million pounds.
According to THG, the negative sales growth “was largely as planned” and was linked to its strategy of “prioritising higher margin sales”. It added that its exit rate continues to support its expectations of core divisional growth for the remainder of the year. The company said it had ultimately decided to “de-emphasise certain geographies” in order to enhance profitability, and has centred its focus around a string of new partnerships for the first three months.
For FY23, the board is anticipating revenue growth across continuing divisions of low to mid-single digit, with adjusted EBITDA expected to fall in line with the company consensus. It added that profitability and cashflow improvements during Q1 supported its expectation of “significant margin recovery” for the year, potentially resulting in adjusted EBITDA margins of around 9 percent over the medium-term.
While its capital expenditure is forecasted to be up to 135 million pounds, and in the range of 130 to 140 million pounds in FY24, as an offset of its investments into infrastructure, it concluded that it expects to become free cash flow neutral in FY23 and turning positive in FY24.