The THG share price slumps 9%. Is the market overreacting?

The THG share price has slumped in early deals after it released a trading update and profit warning. This could be an overreaction.

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The THG (LSE: THG) share price slumped 9% in deals this morning after it issued a trading update for the fourth quarter of 2021

The headline figures in the report look impressive. Fourth-quarter revenues jumped 27% compared to Q4 2020. Acquisitions helped boost sales as well as organic growth. Overall, the group’s sales hit £2.2bn for 2021 as a whole, up nearly 38% year-on-year and 95% compared to 2019 levels. 

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However, it looks as if the business is suffering from the inflationary pressures that are biting across the retail sector. The company is warning full-year profit margins will be lower than expected. It is now forecasting margins of 7.4% to 7.7% compared to the 7.9% previously expected. Management expects these strains to last until at least the second half of 2022. 

Market sentiment 

I think this downbeat outlook explains why the market is punishing the THG share price today. The company was already facing a lot of pressure heading into these results. It has been fighting off concerns about its corporate governance structure, growth outlook, and accounting standards over the past couple of months. Falling margins are just the latest headwind facing the business, although these are mostly out of its control. The entire economy is having to deal with the challenge of rising prices. Some businesses can pass these price rises on to consumers. Others are struggling. 

As the firm’s update explains, these pressures are likely to remain an issue for the group for at least the next year.

Nevertheless, I think THG is better placed than many of its peers to navigate the uncertainty. The company has been built from the ground up using technology, and can use technology to reduce costs and improve efficiency. 

The enterprise has also invested heavily in infrastructure over the past 12 months. It has spent £1bn building its order fulfilment technology, suggesting that the business has the infrastructure needed to meet rising order volumes and capitalise on the booming e-commerce market. 

THG share price pressure 

Despite its competitive advantages, the company is struggling to rebuild confidence in the City. Analysts are incredibly sceptical about THG’s prospects. The latest warning about profit margins has not helped improve sentiment. 

That being said, I think the market is overreacting following today’s release. Sales growth of 38% year-on-year is incredibly impressive. What’s more, as I have tried to highlight above, every single retailer is having to deal with rising prices, so it seems strange that THG should be overly punished for something the rest of the industry also has to grapple with. 

I think today’s decline is more of a reflection of general investor sentiment towards the business. The market seems to be looking for any reason to sell the stock. 

For long-term investors, this could be an opportunity. In theory, equity prices should track underlying business performance in the long run, suggesting that if sales continue to expand, the THG share price should follow suit. And with that being in the case, I would be happy to buy the stock for my portfolio as a speculative investment today. 

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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