The THG share price is down 20% today. Time to buy?

Jon Smith outlines the reasons why the THG share price is plummeting today, and if this represents a buying oppportunity for him.

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It has been a volatile start to the day for THG (LSE:THG) after the release of half-year results. Previously branded as The Hut Group, THG’s share price is down 20% so far on Thursday, trading at 39.3p. There are some clear negatives to take from the report, but is this drop completely justified?

Negatives from the results

The main figure that people will jump on is the significant rise in the operating loss for the six months. It was £89.2m, wider than a loss of £17.4m in H1 2021. Given that group revenue was actually up by 12.3% for this period, the hit didn’t come from lower customer demand.

Rather, the business specified a few points that contributed to the loss. It mentioned increased administration costs, relating to headcount, governance and marketing. The firm also said the loss was reflecting its “consumer price protection investment strategy“. This sounded like corporate jargon to me, so I dug a little deeper.

What this refers to is the fact that like many other businesses, THG is experiencing cost inflation. Rather than pass this fully on to customers, it’s trying to absorb some of it. This naturally reduces the gross profit margin, which I noted had fallen by 4.4%. In doing this, THG calls it a price protection strategy for customers.

The impact of all of the above means that the net debt/cash position deteriorated from a positive number of £384.6m in H1 2021 to a negative figure of £225.6m now.

The fall in THG share price

The market clearly took the results badly, with the sharp move lower seen immediately. This compounds the 92% fall over the past year. To a certain extent, I think that some investors who have been holding the stock for a while have decided that now is the time to throw in the towel.

I think this is exacerbating the move lower today, as I don’t feel that the results and outlook are actually that dreadful. For example, the company said the issues relating to higher costs tie in with “elevated commodity pricing, foreign exchange headwinds and wider inflation following on from Covid-19 impact and subsequently the war in Ukraine.”

These are all temporary problems. Sure, I don’t expect any to be resolved tomorrow. But if the business can ride out the next year or so, I don’t see all of these factors still being a headache.

This leads me to the flipside, revenue. The business had a record revenue performance of £1.1bn. Both the Beauty and Ingenuity division had growth of over 20%. Clearly, there’s demand for the products and services offered.

Despite my reasoning here, I still won’t be investing. Even though I think it’s a good business, I think the issues over the past couple of years mean that investors will be incredibly sceptical about buying the stock. I’ll invest in the business at some point, but as can be seen from the reaction today, I don’t think now is the right time.

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.

Jon Smith 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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