Can the THG share price ever recover?

It’s hard to believe it’s been less than half a year since THG (LSE: THG) is listed on the stock market, rising 30% in its first day of trading. The dust has long settled and THG’s stock price has fallen 93% since then. Can it recover?

THG faces ongoing business challenges

Stock prices are not necessarily related to business performance. However, in the long run, it is difficult to show that the business is struggling.

In some ways, I don’t think THG is struggling. It was announced yesterday that profits increased by 3% last year. That is not strong growth, but positive. The company is widely called intellect the digital platform did even better, with revenues up 7% from the previous year.

Sales is one thing though. Other profits. That’s where THG seems to struggle the most.

Yesterday’s statement did not provide detailed earnings information. But at the interim stage, the company reported a loss of £106m. This is a 30% jump from the £82m loss the company already reported in the same six months last year.

Action plan in place

THG is taking steps to address these challenges. It is trying to focus more on areas where the profit margins are attractive and has stopped some lossmaking activities. The retailer of nutritional supplements, beauty and luxury goods is significantly reducing its workforce.

All are steps in the right direction, albeit late in my opinion. Despite the positive moves, I continue to see THG as a disappointing business due to its lack of profitability.

After eliminating certain activities, the company forecasts “Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) on a c basis. £100 million” this year.

Those complicated financial metrics are red flags for me as an investor. In the first half, for example, THG adjusted EBITDA came in at £32m. But the statutory loss is £106m. So, although the headline profit outlook looks promising, at the statutory basic income level, I expect the results to be worse.

Big task ahead

To get back to where it was a year ago – let alone a higher flotation rate – THG’s share price would have to more than triple.

Can it do that? In principle I can. Companies continue to increase profits, while cutting costs can increase profits. I think the Ingenuity platform has promise, although it’s hard to quantify it financially.

Shares may not recover though – and if they do, I expect it to take a long time.

THG’s credibility in the City is weak. I continue to be hurt by the lack of detailed financial data (such as profits) in some key areas of the business. The company continues to lose massively. It has not proven to be a viable business model that can be profitable over the long term.

I think a lot should be right for THG’s stock price even though it has a good chance of recovery. So far, at least, I don’t have enough confidence in the company’s management or business strategy to see it as a possibility and not just a possibility. I will not buy the stock.