THG downgrades yearly outlook as rising inflation dents revenue growth

THG has downgraded its annual forecasts after increasing commodity prices and economic uncertainty caused expanding consumer demand to slow down. 

The online commerce group now expects adjusted core earnings of £100million to £130million in 2022, rather than matching last year’s £161million as predicted in previous guidance. 

Alongside this, it anticipates sales to expand by just 10 to 15 per cent instead of 22 to 25 per cent, partly due to a strong prior year comparative when enforced shop closures drove a surge in online retail.

Inflation: THG said that ‘unusually high’ raw material prices, mainly for whey, had caused costs

Soaring energy costs and interest rate hikes are also expected to dent the speed of turnover growth as customers cut back on discretionary expenditure.

THG revealed that its costs had been bolstered by ‘unusually high’ raw material prices, greater investment in hiring new staff, and broader inflation resulting from the Covid-19 pandemic and the Ukraine war.

However, it has committed to putting up prices ‘slower and lower than inflation’ in order to gain greater market share and maintain affordability. 

Because of this strategy, the Manchester-based company saw first-half operating losses surge more than fivefold from £17million last year to £89million this time around.

Matt Moulding, the firm’s co-founder, said: ‘Against the tough macro-economic backdrop, we have prioritised our loyal customer base over maximising near-term gross margins focusing on retention and growth of consumers.

‘The strength, resilience and agility of our vertically-integrated business model, coupled with automation, has enabled us to significantly invest in price protection for consumers currently facing unprecedented cost-of-living challenges.’

THG shares plummeted by 18.6 per cent in early trading to 39.9p, meaning their value has declined by over 80 per cent in 2022 alone.

Today’s trading update comes almost two years to the day that THG, which was formerly known as The Hut Group, was listed on the London Stock Exchange in what was the capital’s biggest initial public offering in seven years.

After hitting a peak value of £5.4billion, the company’s market cap began a gradual descent in Autumn 2021 as lockdown restrictions were loosened and corporate governance issues mounted.

Problems have been exacerbated by a disastrous capital markets day in October last year, and major investors like The Capital Group and Goldman Sachs divesting large stakes when the company declared plans to de-list its beauty business.

THG’s beauty arm has doubled in size since the IPO, supported by numerous large-scale acquisitions, including Cult Beauty, Bentley Labs and American skin care website Dermstore.

For the six months ending 30 June, it saw the highest sales increase of any division, climbing 20 per cent to £552.8million, which helped boost the e-commerce group’s total revenues to a record £1.1billion.

‘THG boasts of a loyal customer base,’ said AJ Bell investment director Russ Mould. 

‘But when it sells commoditised products, this loyalty is going to be tested as consumers look hard for ways to save money – and that could mean buying their protein or beauty products from somewhere else.’

This post first appeared on Dailymail.co.uk