THG Holdings (LSE:THG), which is also known as The Hut Group, is an ambitious tech company operating in e-commerce. It publicly launched in October with its initial public offering (IPO) raising £1.88bn, valuing the company at nearly £5.4bn. The THG share price steadily rose until January, but has declined 20% since then. Today it’s hovering around its IPO price. So could THG make a good long-term investment for me?
Taking brands direct to consumer
The pandemic led to a surge in e-commerce sales and THG was a beneficiary. In 2020, the company added a record 10.7m new customers to its platform. And the group didn’t let Covid-19 get in the way of its expansion plans. It opened five new warehouses and fulfilment centres in global locations, as well as stepping up recruitment.
The IPO provided a sufficient financial injection to continue with its investment in global infrastructure, technology and expanding its brand portfolio. From it, the company used £365m to invest in M&A, mainly in beauty, which is its biggest money-spinner. But it also invested in manufacturing as THG currently manufactures 80% of its nutrition products.
Another growth area for the business is its subscription box service. It offers consumers a monthly subscription containing a mixture of brands. THG is thereby providing a direct way for brands to get their products in the hands of consumers. It uses the money raised from this to plough back into its beauty division.
Lookfantastic is its prominent beauty website that takes brands directly to consumers. And it’s now operating in over 30 different territories. Meanwhile, its Myprotein brand operates in over 50 territories and is still scaling. THG is continuing its acquisition spree in 2021 after acquiring Dermstore in February. In fact, it agreed to acquire healthy snack bar business Brighter Foods last week for £43m in cash.
THG Financials
Last year THG generated £1.6bn in revenue, up 41.5% year-on-year. With beauty being the biggest driver at around £750m. Nutrition brought in £562m and its end-to-end global fulfilment infrastructure, Ingenuity, £118m. Its smaller Ingenuity Commerce division brought in £19.3m in revenue. It was particularly impressive given its 160% year-on-year growth.
Unfortunately, the company incurred a £332m non-cash charge in relation to its IPO and £105m relating to reduction in value of property. These led to a pre-tax loss of £535m in 2020.
Risks to shareholders
Of course, there are risks with any investment and THG is no different. Although it’s a 16-year-old company, it’s still in the early stages of its attempts to scale. It could run out of money, or competitors could undercut prices. Meanwhile, beauty and nutrition are hugely competitive arenas to operate in and for consumers to stay loyal, the company must invest heavily in staying relevant. I think it looks to be doing that so far, but it will need to keep revenues flowing for this to continue.
Inflation could dent disposable income, which could affect THG sales. So the ongoing threat of Covid-19 and the economic damage it is causing also remain a threat in that regard. And this could cause the THG share price to fall further.
Nevertheless, I like that THG is offering its all-in-one Ingenuity service to third-parties. In a digital world where many are vying for attention, I think this has long-term growth potential. I recently invested in THG shares for this reason.
