THG falls after yet another profit warning, but sees recovery ahead

THG falls after yet another profit warning, but sees recovery ahead

By Geoffrey Smith — Shares in U.K. e-commerce company The Hut Group (LON:THG) fell after it cut its profit forecast for 2022 again, hurt by destocking as it pruned a range of unprofitable activities.

The company said it now expects full-year earnings before interest, taxes, depreciation and amortization to be between £70 million and £80 million (£1=$1.2215), down from a previous estimate of £100M – £130M only three months ago.

However, it forecast a significant improvement in the current year, thanks to a sharper focus on more profitable business lines, a drop in costs for inputs such as raw materials and the expected go-live of its U.S. warehouse automation project in the first quarter. In all, THG said it has identified £100M in cost savings that will help it to achieve  “broadly neutral” cash flow this year and positive cash flow in 2024.

The update rounds off a difficult year for THG, which has struggled with higher material and delivery costs and had to write off its business in Russia. As a result, revenue grew only 3.3% to £2.25B, well below its previous heady rate. Revenue was hurt by discounting to shift inventory from lines that the group had already chosen to exit, and by the fact that some orders for its Ingenuity software business were delayed beyond the end of the year.

Ingenuity has moved away from its roots as a software support resource for smaller business partners to focus on larger and higher-margin businesses. THG cited the recent expansion of a strategic partnership with retailer Matalan as evidence of the strategy’s success. Partly as a result of that shift, THG expects Ingenuity to process £1B more in goods orders next year.

“Core commodity prices used within our Nutrition division have seen significant deflation since their record highs in 2022, giving us confidence in significant profit progression as we move through the year ahead,” said Chief Executive Matt Moulding.

Moulding said he’s still “highly confident” of reaching the group’s medium-term target of an EBITDA margin of over 9%.

THG stock nonetheless fell on the news, losing 7.7% by 04:55 ET (09:55 GMT). It has lost over 90% of its value in the last 16 months as some long-term investors, such as Japan’s Softbank (TYO:9984), have abandoned it. However, there have been signs in recent weeks of it – along with other consumer-facing U.K. stocks – finding a bottom. Before Tuesday’s update, the stock had more than doubled from its October lows.