THG downgrades yearly outlook as rising inflation dents revenue growth

THG has revised its annual forecast downwards after rising commodity prices and economic uncertainty slowed growing consumer demand.

The online commerce group now expects adjusted core revenues of £100m to £130m in 2022, rather than match last year’s £161m as predicted in previous guidelines.

In addition, it expects sales to grow by just 10 to 15 percent instead of 22 to 25 percent, partly as a result of a strong comparison last year when forced store closures fueled a surge in online retail.

Rising energy costs and interest rate hikes are also expected to dent the rate of revenue growth as customers cut back on discretionary spending.

THG revealed that costs were pushed up by ‘unusually high’ commodity prices, increased investment in hiring new staff and broader inflation due to the Covid-19 pandemic and the war in Ukraine.

However, it has pledged to raise prices “slower and lower than inflation” to gain greater market share and maintain affordability.

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

Matt Molding, co-founder of the company, said: “Against the difficult macroeconomic backdrop, we have prioritized our loyal customer base over maximizing gross margins in the short term, focused on consumer retention and growth.

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

THG shares fell 18.6 percent in early trading to 39.9 pence, meaning their value is down more than 80 percent in 2022 alone.

Today’s trading update comes nearly two years after THG, formerly known as The Hut Group, was listed on the London Stock Exchange in what was the capital’s largest IPO in seven years.

After reaching a peak value of £5.4bn, the company’s market capitalization began to decline gradually in the autumn of 2021 as lockdown restrictions were eased and corporate governance issues mounted.

The problems have been exacerbated by a disastrous capital markets day last October, and major investors such as The Capital Group and Goldman Sachs divesting large stakes when the company announced plans to close its beauty business.

THG’s beauty division has doubled in size since its IPO, supported by numerous large-scale acquisitions, including Cult Beauty, Bentley Labs and US skincare website Dermstore.

In the six months ended June 30, sales growth was the highest of all divisions, rising 20 per cent to £552.8 million, helping boost the e-commerce group’s total revenues to a record £1.1 billion .

“THG has a loyal customer base,” said Russ Mold, investment director at AJ Bell.

“But if it sells commoditized products, this loyalty will be tested as consumers search hard for ways to save money — and that could mean buying their protein or beauty products elsewhere.”