The United Kingdom is known for many things: the Royal Family, tea and, of course, “cheap” stocks. For example, the main index in the U.K., the FTSE 100, has a trailing 12-month price-earnings ratio of roughly 14, whereas the S&P 500 in the U.S. has a ratio of over 22. Keep in mind, this is also after many British stocks in the FTSE 100 have benefited from cyclical tailwinds, such as oil giant Shell (SHEL, Financial).
In this discussion, I will break down my top two British e-commerce stocks that have been butchered by the market and, therefore, could offer an opportunity for value investors. Let’s dive in.
THG
Formerly known as The Hut Group, THG PLC (LSE:THG, Financial) is a U.K.-based e-commerce company that owns a variety of brands. The business operates across three divisions: Beauty, Nutrition and Ingenuity.
Its nutrition brands include the popular MyProtein.com and various subrands such as MyVitamins, MyVegan and MyPro. The company acquired MyProtein for 58 million pounds ($73.60 million) in 2011 and its overall nutrition business has grown to 659.2 million pounds per year in revenue by 2021.
Its beauty segment consists of a variety of e-commerce websites, such as Lookfantastic, Cult Beauty and Dermstore. These offer over 1,300 brands across the U.K., Europe and the U.S.
Its third segment, Ingenuity, basically offers an end-to-end e-commerce solution for businesses. This includes all hosting, website design and even full warehousing and fulfilment across 16 locations. Although e-commerce websites have become easy to setup and develop with platforms such as Shopify (SHOP, Financial), I believe the fulfilment offering gives Ingenuity a competitive advantage.
Mixed financials
In May, the company reported mixed financial results for full-year 2022 (released later for U.K. stocks). Its revenue of 2.24 billion pounds ($2.7 billion) rose by just 2.67% year over year. This was substantially slower than the 36% growth rate reported for 2021.
Of course, this growth was spurred on by the lockdown of 2020, which boosted e-commerce sales tremendously. Now we are seeing a cyclical pullback in the industry. A positive is market leader Amazon.com Inc. (AMZN, Financial) is also facing a similar dynamic. However, I do not believe it is a permanent market issue.
The real challenge for THG has been its sharp increase in losses, from 137.5 million pounds in 2021 to 495.6 million pounds last year.
Its adjusted Ebitda margin has also compressed from 7.4% in 2021 to just 2.9%.
This was mainly due to cost inflation across its supply chain, which squeezed the company’s margins. A positive is THG is vertically integrated like Amazon and, thus, should have greater control over its margins.
As it aims to cut costs, the company has reduced its group headcount by close to 2,000 people.
In addition, it has strengthened it liquidity position with an extra 156 million pounds banking facility added. This gives the business a total liquidity position of 640 million pounds and net debt of 181 million pounds.
Valuation
The Hut Group has seen its stock price get butchered by close to 84% since its initial public offering in 2020.
This was driven by a compression in the multiples of growth stocks, as well as a scathing short seller report.
The stock now trades with a price-sales ratio of 0.37, which is lower than its historic levels.
Boohoo
Boohoo Group PLC (BHOOY, Financial) is a U.K.-based e-commerce company that owns a plethora of fast fashion brands, including Boohoo, Boohoo Man, PLT, Coast and many more.
The business operates with a social media first strategy, which rapidly tests user feedback in order to iterate its collections.
Boohoo then enhances this with a series of gold standard influencer marketing campaigns with celebrities such as the Kardashians, Paris Hilton and many more. For its male brands, legendary boxer Floyd Mayweather has previously sponsored shoots along with various rap stars.
Cyclical financials
The company reported 1.77 billion pounds in revenue for fiscal 2023, which declined by 11% year over year. This was primarily driven by a cyclical pullback in the e-commerce market after a major boom during the lockdown of 2020. A silver lining is, relative to 2020, its revenue is a up a solid 43%.
The real challenge came with regard to profitability. Boohoo reported an atrocious loss of 90.7 million pounds ($112 million), which was substantially worse than the profit of 7.8 million pounds reported in the prior year.
This was driven by huge cost inflation in its supply chains. Shipping delays to the U.S. meant the company was even chartering its own planes to fly goods directly to consumers. Of course, this is an expensive strategy and definitely not a long-term solution.
A positive is Boohoo has announced plans to open a 1.1 million square foot distribution center in the U.S., which is expected to open by the third quarter of this year. The goal is to reduce shipping times from 10 days to three days. This strategic move is vital given consumers have gotten used to next-day and even same-day shipping from companies such as Amazon.
In addition, Boohoo is facing major competition from companies like Shien and the Shopee app.
Its product mix also caused a surge in return rates, which impacted margins. The good news is Boohoo (and its competitors) have introduced a 1.99 pounds return charge. I believe this is a positive move and would like to see more proactive measures such as this.
Boohoo’s free cash flow has been solid with 30.2 million pounds reported for the year. This was due to an improvement in its working capital as the company managed its inventory more effectively.
Its balance sheet has also become sustainable thanks to a 325 million pounds revolving credit facility, though I would like to see the business build up its net cash position from greater than the 5.9 million pounds reported.
In the long term, management announced plans to return to double-digit revenue growth and increase adjusted Ebitda margins back to the 6% to 8% range. This is expected to be achieved through a variety of product investments, an improved cost structure and a lower number of returns.
Valuation
Boohoo trades with an enterprise value-to-forward Ebitda ratio of 8.40, which is cheaper than its five-year average. Further, the stock has a price-sales ratio of 0.27, which is lower than its average for the same period.
The GF Value Line indicates a fair value of $45.44 for its U.S.-listed shares, which is based on its historical ratios, past financial performance and analysts' future earnings projections. Therefore, the stock looks to be undervalued as it trades around $9 per share.
Final thoughts
Both THG and Boohoo have been hit by similar issues, including a cyclical pullback in the e-commerce industry as well as short seller reports. A positive is the market butchered the share prices to ridiculously low levels despite both having higher sales then a couple of years prior. As supply chain issues have begun to ease, I expect margins to improve. Therefore, both stocks could be great value investments.
