Should I snap up THG shares at under 60p?

THG’s share price has surged higher after founder Matthew Moulding splashed £5m on stock. But are the shares really cheap? Roland Head investigates.

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The THG (LSE: THG) share price has surged 40% higher over the last month. Shares in the online beauty and sports nutrition group are trading just under 60p, as I write, up from a record low of 31p.

THG’s stock bounce appears to have been driven by news that founder and CEO Matthew Moulding has spent £5m buying back shares in the company from Japanese investor Softbank.

The shares are still trading 90% below their IPO level. But I’m wondering if this could be a turning point for THG. Should I consider adding this stock to my portfolio as a recovery play?

The Covid boost is over

THG is on track to report revenue of £2.4bn this year, making it a decent-sized retailer. But while sales rose by 35% in 2021, this year has been slower. The group’s revenue rose by just 8.8% during the first nine months of 2022.

Even this figure was helped by the acquisitions of Cult Beauty and Bentley Labs. Unfortunately, THG’s reporting doesn’t specify how much of its sales have come from acquisitions during the year. However, my guess is that sales would have been broadly flat so far in 2022 without the bought-in growth.

This makes me wonder whether growth at core brands such as Lookfantastic and Myprotein may have peaked.

I’m also a little worried about THG’s ongoing losses. THG is expected to report a pre-tax loss of around £175m this year. Broker forecasts suggest the company will remain loss making until at least 2024.

THG expects to have £500m of cash on hand at the end of the year, so there’s no immediate risk of problems. But most of this money has come from loans that will need to be repaid at some point. At the end of June, the company reported net bank debt of £226m.

THG share price: I’m not buying

Moulding expects 2023 to be a better year. He says that lower commodity prices will allow the business to improve profit margins and cut prices to consumers. This should help to reignite sales growth. Moulding also expects to see consumers “prioritise beauty, health and wellness” despite cost-of-living pressures.

I can’t predict the future success of THG’s brands. For this reason, I’d only want to buy the shares if I thought they were really cheap. Unfortunately, I don’t think they are.

THG is loss making, so the stock doesn’t have a price to earnings ratio. However, an alternative measure I can use is the price to sales ratio.

At a share price of 57p, THG is trading on a price/sales ratio of around 0.3. For comparison, online retailer ASOS is currently valued at just 0.16 times sales, even though the fashion firm is expected to return to profit next year.

On balance, THG stock isn’t cheap enough to interest me at the moment. This business has disappointed the market this year. Although the outlook could improve in 2023, there’s no guarantee of this. I’d want to see firm evidence of improving performance before risking my own cash.

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 ASOS. 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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