THG revenue and profit affected by focus on holding down prices

By

Sandra Halliday

Published
Apr 18, 2023

Just a day after headlines about a surging share price linked to a bid approach for the company, THG was back in the news on Tuesday as it released a trading update and its full-year preliminary results.

The Lookfantastic, Cult Beauty, Dermstore and Espa owner had nothing to say about the takeover talks, but said FY22 adjusted EBITDA was in line with guidance, and that it's made a positive start to the latest financial year with revenue momentum "improving significantly" through Q1 and profitability and cash generation “much improved” year-on-year.

That said, on the surface, the Q1 performance doesn’t look so great. Group revenue fell 8.6% to £469.4 million and within that, THG Beauty revenue was down 10.7% at £253.9 million and THG Ingenuity was down 10.1% at £35.6 million. Continuing revenue for the group was down 5.6% at £457.4 million with a 58.8% fall in revenue for discontinued operations. 

Yet the company said it has had a “positive” start to the year, and the sales issue was “largely as planned, as a result of prioritising higher-margin sales”. It added that a “significantly improving exit rate supports our expectations of core divisional growth each quarter for the remainder of the year”. Ongoing input cost deflation and the annualisation of cost actions are boosting profitability improvement.

Within the key Ingenuity division, it added that the Q1 performance reflects the refocus on larger, higher-value and higher-margin clients with high-quality recurring revenues.

2022 PERFORMANCE

As for last year, group revenue was up 2.7% at £2.239 billion, and rose 38.8% on a two-year basis. Within that, the giant THG Beauty division rose 4.5% over one year and 54.1% over two to £1.235 billion.

THG Ingenuity rose 9.1% over a year and 78.9% over two years to £159.6 million. If you add in the revenues from the important Nutrition division and exclude other smaller divisions, as well as discontinued operations, core divisional revenue rose 4.1% over one year and 42.5% over two years to £2.069 billion.

Adjusted EBITDA was £64.1 million but the operating loss was £495.6 million, wider than £137.5 million a year earlier. This was a result of the challenging backdrop (cost inflation and commodity prices) and a focus on price protection for customers. These costs are expected to be partially transitionary in nature and are showing "promising signs of abating as we move into 2023". 

The company said international sales accounted for 57% (down from 58%) of total group revenue, with the US “continuing to be an evident growth opportunity” (+9.9%), following on from the successful 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, “reinforcing our strong position and continued consumer demand in one of our core markets”.

Returning beauty and nutrition customers generated over 82% of D2C Group revenues (FY 2020: 78%), “reinforcing the repeat nature of our digital brands, Ingenuity's frictionless retailing environment and the enduring nature of [the] consumer channel shift to online”.

The reduced gross profit margin at 41.3% (FY 2021: 44.7%) “primarily reflects the strategy to partially shield consumers from adverse macroeconomic conditions and a period of unusually high raw material costs. This investment drove customer retention (over 16 million active Beauty and Nutrition customers), underpinning future growth”.

As for this year, it expects group revenue growth across continuing divisions of low-to-mid single-digits. Adjusted EBITDA is expected to be in line with the company consensus, with a significant weighting to the second half of the year.

CEO Matthew Moulding, said: “We continue to make good progress. While 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.

“The challenging macro and inflationary environment required decisive action across the business with around £100 million 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.

“In THG Ingenuity, we appointed a highly experienced CEO to focus on long-term, higher-value enterprise accounts. The repositioning of the division is on track with the strategy now paying dividends, evidenced by recent announcements and a strong 2023 pipeline.”