The Hut Group (LON:THG) shares surge – should I buy now?

THG shares are surging after the company reported “numerous” bid approaches and said sales rose by 35% in 2021.

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THG (LSE: THG) shares are up by 20% as I write on Thursday morning, after the company said it had received bid approaches from “numerous parties in recent weeks”.

Although the THG share price is still down by more than 80% over the last year, I’m wondering if today’s news could signal a turning point for this troubled growth stock. Should I look at buying THG shares for my portfolio?

Is bid news a buy signal?

THG has been one of the most disastrous IPOs of recent times. The company, which is led by founder Matthew Moulding, has seen its market cap fall from over £6bn to just £1bn since its IPO in September 2020.

Given this, today’s news of bid approaches seems encouraging. However, it sounds to me like these offers were always doomed to fail.

According to founder and chief executive Matthew Moulding, THG has received a number of proposals in recent months, but they have all been unacceptable, “failing to reflect the fair value of the group”.

Moulding says that all the approaches were rejected and that THG is no longer in receipt of any proposals.

My guess is that as the company’s founder, his idea of fair value is a lot higher than that of outside buyers. But who’s right? To decide, I need to learn more about THG’s numbers.

Sales up 35% in 2021

My first port of call is today’s results, which cover the 2021 calendar year. These show that THG’s sales rose by 35% to £2,180m last year. That’s in line with City forecasts and seems like fairly strong growth to me.

Unfortunately, sales growth wasn’t matched by profit growth. THG’s adjusted cash earnings (‘EBITDA’), which exclude a number of costs, rose by just 7% to £161.3m. That gives an adjusted EBITDA profit margin of 7.4%, down from 9.3% in 2020.

Worse still, this business remains loss making at an after-tax level, with a reported loss of £138m for the year just ended.

However, THG is a growth business and its losses do appear to be reducing. Will the picture improve this year?

THG shares: outlook uncertain

For me, one attraction of this business is that 80% of its sales come from repeat customers. This suggests to me that THG brands such as Myprotein and Lookfantastic have a loyal following.

In 2022, THG expects to see sales growth of between 22% and 25% as it recruits new customers. Based on this guidance, I estimate that THG shares could be trading on around 0.5 times forecast sales. That’s a similar valuation to online fashion retailer boohoo. It could be a fair price for THG.

However, one key difference between boohoo and THG is that boohoo is much more profitable.

The fashion giant is expected to report an after-tax profit of £75m this year, on £2.2bn of sales. By contrast, THG is expected to report a loss of £25m on £2.8bn of sales.

Although I’m impressed by THG’s ongoing sales growth, I’m worried about its lack of profitability. Even with sales of more than £2bn, it’s still not making any money.

In my view, there are better choices elsewhere in the online retail sector. I won’t be buying THG shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. 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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