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THG and the odd case of the cash outflow

The Hut Group

THG and the odd case of the cash outflow

When working capital movements don’t follow the rulebook.

© Ryan Edy

What does THG mean to you?

Plug those three letters into an acronym search and things like specialist PC parts site Tom’s Hardware Guide, dystopian tween flick series The Hunger Games and Thangool airport pop up.

For close watchers of the UK stock market, however, those letters will probably mean only one thing: £7.2bn THG, or the artist formerly known as The Hut Group.

Following its listing almost exactly a year ago, the protein powder slash beauty retailer slash wannabe e-commerce platform provider has been exceptionally busy. It has managed to cram a name change, three acquisitions and a $730m tie-up with none other than SoftBank into one rotation around the sun. Impressive, you might remark.

Yet despite all of that, its share price has gone sideways since it popped on IPO day to 685p:

Flicking open its interim results, published on Thursday, it’s not hard to understand why. Layered among the breathless use of e-commerce buzzwords and promising new partnerships was the rather unremarkable fact that, despite increasing revenues 42 per cent year-on-year to £959m, after-tax losses almost doubled to £82m.

But it wasn’t only the operating losses that caught our eye. THG’s operating cash loss came in at £10.5m, particularly surprising as the company managed to make £86m during the same six months of 2020.

From the breakdown at the back of the interims, it was clear what the culprit was. Here’s the relevant table (with our underlining):

Yes, THG’s payables — the money largely owed to its suppliers — were a £52.5m drag. In other words, it looks like the company got in the practice of paying off its creditors much faster than it did in 2020.

Brisk movements in working capital flows are not unusual in some sectors. For instance, travel providers such as Tui or Jet2 collect money from customers in the months leading up to the summer, creating a cash inflow in the first half of the year, before enduring the costs when punters take to warmer climates. In business parlance this is known as “seasonality”.

And in this case THG made the same argument, explaining in the interims that “trade payables reduced reflecting seasonality”. Fair enough.

Yet this explanation didn’t quite sit right with FT Alphaville.

Why? Well, for one, THG didn’t seem to expect this outflow. In its outlook for 2021, published in its 2020 annual report (page 157), it said “THG’s strong cash flow model and continued working capital improvements will provide further liquidity to continue to reinvest in the business’s infrastructure.”

And that was the case last year, at least. Look at the table above. In 2020 — an exceptional year, granted — payables provided a £95.5m cash inflow. This may have been because the company was conserving cash during Covid, and so decided to extend its payment terms for a brief period. But that would be unusual for a large, well-funded retail business where maintaining supplier relationships is critical.

If anything you’d expect the opposite. For instance Tesco offered improved payment terms for its smaller suppliers during the gruelling months of the pandemic.

And then there’s characteristics of the business model itself. Retailers — whether it be Amazon, Tesco or Wayfair — are famous for being low margin but cash generative. This trick is down to the payment terms. Customers pay almost instantly for their groceries, protein powder or office chairs, while retailers tend to pay their suppliers at least 30 days later. This creates a natural “float” of cash for the company to use at its discretion, and stops the sector being reliant on outside capital.

You’d largely expect THG to be the same as its two direct-to-consumer divisions — THG Beauty and THG Nutrition — still account for around four-fifths of its revenue. And up until this year, those expectations would be correct.

FT Alphaville trawled through THG’s Companies House page and found that in every financial year back to 2009, the company reported a cash inflow from its payables. In other words, its payment terms have been continuously favourable to the company up until now.

So what might be going on here apart seasonality? One possibility that crossed FT Alphaville’s mind was THG could be paying off some money owed from reverse factoring. (If you don’t know what reverse factoring is, there’s an excellent FT explainer here.)

There are some clues if you look hard enough. In its IPO prospectus THG said that it had a supply chain programme of £25m available from Santander. The document also mentions “short term working capital facilities” while its latest articles of association also cite “non-recourse supply chain financing or receivables financing in the ordinary course of business” under its definition of “moneys borrowed” (page 11). However, these facilities were not mentioned in the 2020 annual report. To boot, the company also has a director of supply chain finance, according to LinkedIn.

So it could be that. Or it could just be the season cycle moving round and round.

Unfortunately, THG did not reply to a request for comment by deadline, so we might never know.

Related Links:
An appetite for cash is turning THG Japanese — FT

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