Image source: Britvic (copyright Evan Doherty)
It can be difficult to remember that, just a few short years ago, THG (LSE: THG) was seen as potentially being a future tech superstar of the UK stock market. Instead, the THG share price has lost 95% of its value in five years.
The fact that it still commands a market capitalisation slightly north of half a billion pounds is a reminder of how big hopes once were for the online nutritional supplements and beauty product retailer.
Has that dream now completely burned out? Or might the current THG share price offer a potential bargain for an investor with a long-term mindset?
A sizeable business, but with lots to prove
For the first half, THG reported revenues of £0.8bn. That was 8% lower than the equivalent period last year. But it goes to show that THG is a fairly substantial business.
The performance had other aspects of ‘yes, but’ to it.
For example, net debt fell year on year by 8%. However, it still came in at £321m. That is not insubstantial.
Similarly, free cash flow improved year on year – but was still negative. Cash and cash equivalents at the end of the first half were less than half of the equivalent at the same point one year before.
On a positive note, the company swung to a £76m profit in the period. That’s compared to a £121m loss in the prior year.
But wait! That had been driven by its Ingenuity division, now demerged. Considering only continuing operations, the first half’s loss of £66m was actually larger than the previous year’s.
Now you see it, now you don’t
Hang on. Why demerge Ingenuity?
After all, that division had been a core part of the THG investment case. Its focus was on enabling other companies to sell products online.
A bit like Ocado, the firm’s own retail operation was in a sense a proof of concept (as well as being a sizeable standalone business) that could help sell technical solutions to other digital retailers.
The City never really got as excited as THG management did by the prospects laid out for Ingenuity. Indeed, I think that partly helps explain why the THG share price has tanked over the past five years.
On that basis, taking Ingenuity out of the equation ought to make the rump of the company easier to understand – and to value.
But the downside of that move is that, with Ingenuity removed from the picture, the investment case is now more narrowly focussed on the firm’s core business of online beauty and nutrition sales.
With beauty sales falling 12% year on year in the first half and nutrition sales ticking up just 1%, I remain to be convinced that the strategy can help justify even the current share price, given the ongoing red ink at the business.
THG has some firm foundations for growth, with a large customer base and proven sales ability. But its loss-making business model remains unproven as far as I am concerned.
Even at its current level, I am not convinced that the THG share price is a bargain – and will not be touching it with a bargepole.
