E-commerce stock The Hut Group (LSE: THG) has had a rough year to say the least: the share price has fallen 88% in the last 12 months. In the last week, it dropped by 2%, now sitting at 70p.
The stock’s downfall was kickstarted in September 2021. The company reported a devastating operating loss of £17.4m in its half-year report. This clearly pushed many investors to jump ship.
With a tremendous fall in share price, I’d be tempted to add cheap THG shares to my portfolio. But I’m not confident that The Hut Group can recover from this complete plummet. Let’s take a look.
Ingenuity or ignorance?
The online retailer develops brands’ digital presence. It does so through its prized Ingenuity platform, which now hosts a total 187 websites. Alongside this, the company generates other revenues through its THG Beauty and Nutrition retail.
A diverse income is definitely an attractive aspect of any company’s operation. Indeed, during the lockdown period, The Hut Group expanded both its own brands and its B2C service as online sales shot up. This led to total revenues increasing from £1.6m to £2.2m across the second quarters of FY21 and FY22.
However, The Hut Group stated interest in separating “THG Beauty by way of a listing or strategic partnership”. This is part of management’s wider plan to divide key business units to create corporate flexibility. That said, I believe this decision is poorly timed.
The company’s operating loss soared to £137m in its FY21 report. This figure will only worsen as the pandemic continues to fade away – and consumers return to physical stores. This suggests The Hut Group needs to focus on its operational health, not its corporate structure. Yet managerial focus on the latter leads me to believe the THG share price is set to fall even further.
Missed opportunity
Last month, The Hut Group announced the cancellation of its deal with Softbank. The deal offered a £900m investment opportunity, and would have placed the company’s valuation at £4.5bn. Yet the THG share price only suffered a 1% drop in share price as a result of the withdrawal. However, I believe the full implications of this are yet to surface.
The Hut Group claimed the withdrawal was due to ‘global socioeconomic conditions’. Indeed, inflationary increases have impacted the company’s production costs.
Also, the company blamed increases in distribution costs (£43m in FY21) on the impacts of Covid-19. However, this is rather questionable given management’s crediting of increased sales revenue to the pandemic-induced lockdown. Indeed, the cancellation suggests the company lacks confidence in its ability to navigate these operational disruptions.
Considering this, it makes sense that The Hut Group decided to withdraw. But the cancellation confirms my concerns. It’s evident that the company will be unable to push operational growth in the near future. There is little hope of the company mitigating huge operating losses. Also, untimely changes to corporate structure could cause further turmoil.
This reaffirms my belief that the THG share price is set to fall even further. Because of this, I won’t be adding The Hut Group shares to my portfolio any time soon.
