THG and the odd case of cash outflow


Updates from the Hut group

What does THG mean to you?

Plug those three letters into a search for acronyms and things like a site specializing in PC parts Tom’s Hardware Guide, the dystopian teenage film series The Hunger Games and Thangool Airport appear.

To keen observers of the UK stock market, however, these letters will likely mean only one thing: £ 7.2bn THG, or the artist formerly known as The Hut Group.

After registering almost exactly a year ago, e-commerce platform provider slash wannabe, a protein powder beauty retailer, has been unusually busy. He managed to cram a name change, three acquisitions, and a $ 730 million merger with none other than SoftBank into a single spin around the sun. Awesome, you might notice.

Yet despite all of this, its share price has rocked since it hit 685p on the day of the IPO:

Open sound intermediate results, released Thursday, it’s not hard to see why. Among the breathtaking use of e-commerce buzzwords and promising new partnerships was the rather mundane fact that, despite a 42% year-on-year increase in revenue to £ 959million, after-tax losses nearly grew. doubled to £ 82million.

But it was not just the operating losses that caught our attention. THG’s operating cash loss amounted to £ 10.5million, which is particularly surprising as the company managed to earn £ 86million in the same six months of 2020.

From the breakdown at the back of the middlemen, it was clear who was to blame. Here is the corresponding table (with our underline):

Yes, THG’s debts – money largely owed to its suppliers – was a drag of £ 52.5million. In other words, it looks like the company has made a habit of paying off its debtors much faster than it did in 2020.

Abrupt movements in working capital flows are not unusual in some industries. For example, travel providers such as Tui or Jet2 collect money from customers in the months leading up to the summer, creating a cash inflow in the first half of the year, before bearing the costs when punters visit. warmer climates. In business jargon, this is called “seasonality”.

And in this case, THG made the same point, explaining in the meantime that “trade debts have declined due to seasonality.” Fair enough.

However, this explanation did not quite suit FT Alphaville.

Why? Well, for one thing, THG didn’t seem to be expecting this release. In its outlook for 2021, published in its annual report 2020 (page 157), he said that “THG’s strong cash flow model and continuous improvement in working capital will provide more liquidity to continue to reinvest in corporate infrastructure.”

And that was the case last year, at least. Look at the table above. In 2020 – an exceptional year, granted – the debts provided a cash inflow of £ 95.5million. This may be because the company was conserving cash during Covid and therefore decided to extend its payment terms for a brief period. But that would be unusual for a large, well-funded retail business where maintaining supplier relationships is essential.

If anything, you would expect the opposite. For example Tesco offered improved payment terms for its small suppliers during the grueling months of the pandemic.

And then there are the characteristics of the business model itself. Retailers, whether Amazon, Tesco, or Wayfair, are notorious for being low-margin but cash-generating. This tip is due to the terms of payment. Customers pay for groceries, protein powder, or office chairs almost instantly, while retailers tend to pay their suppliers at least 30 days later. This creates a natural “float” of liquidity that the company can use at its discretion and prevents the industry from relying on outside capital.

You’d largely expect THG to be the same as its two direct-to-consumer divisions – THG Beauty and THG Nutrition – still account for around four-fifths of its revenue. And until this year, those expectations would be correct.

The FT Alphaville passed through the Companies House of THG page and found that in each financial year since 2009, the company has declared an inflow of cash from its debts. In other words, its payment terms have so far been continuously favorable to the company.

So what is going on here besides the seasonality? One possibility that crossed the mind of FT Alphaville was that THG could refund some of the money owed to reverse factoring. (If you don’t know what reverse factoring is, there’s a great FT explainer here.)

There are a few clues if you look closely enough. In his IPO prospectus THG said it has a £ 25million supply chain program with Santander. The document also mentions “short-term working capital facilities” while its latest statutes also cite “non-recourse supply chain finance or normal course debt financing” in its definition of “borrowed money” (page 11). However, these facilities were not mentioned in the annual report 2020. To boot, the company also has a director of supply chain finance, according to LinkedIn.

So that could be it. Or it could just be the cycle of the season going in circles.

Unfortunately, THG did not respond to a request for comment on time, so we may never know.

Related links:
The appetite for money makes Japanese THG – FT


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