Since floating in September, media coverage of THG has centred almost exclusively on co-founder Matthew Moulding © via REUTERS

“The more that you say the less I know,” sings Taylor Swift, possibly in relation to online retailer THG.

Since floating in September, the company once known as The Hut Group has delivered three trading statements, a sustainability action plan, two acquisitions, two management updates, a rejig of corporate advisers and a name change. Media coverage in-between has centred almost exclusively on co-founder Matthew Moulding, while broker research is clogged with talk of ecosystems and symbiotic end-to-end solutions.

None of it answers the simple question: what does THG actually do? Niches of sports nutrition and beauty appear crowded and an outsourcing arm that puts brands online is hardly a unique proposition, yet the stock is up 60 per cent since listing. What’s the special sauce?

One answer can be found on social media. Each day a flood of videos arrives on YouTube, Facebook and Instagram of people opening boxes of cosmetics. Many are supplied by Lookfantastic and Glossybox, both owned by THG, and a fair proportion carry affiliate links that give the uploader a cut of their viewers’ purchases. Buyers who click through are signed up automatically to receive a lucky dip selection each month.

THG’s 2019 annual report mentions that beauty boxes have more than 370,000 subscribers across 146 markets, though those outdated figures tell only half the story. Subscription boxes also provide the most visible example of THG’s strategy, which lets brand owners piggyback on its sales and logistics systems for a quick route to market. No surprise that those unboxing videos feature a lot of product from clients of the ecommerce outsourcing division, THG Ingenuity.

Subscription boxes put samples into the hands of high-spending customers. The value of exposure means suppliers will give away product for free, so margins are fatter than through conventional sales channels. Marketing costs are low and easy to control, with THG relying on a house-marshalled army of more than 19,000 influencers. All this helps explain why THG’s beauty division last year delivered 57.1 per cent revenue growth — an impressive performance when Lookfantastic, its only shopfront of scale, has neither a price advantage over rivals nor a unique selling point.

What is more complicated is how to value THG Ingenuity — a still fledgling business whose revenue growth slowed from 60 per cent in 2019 to just 7.2 per cent last year. Success reselling cosmetics may be tough to replicate in other sectors and the software-type valuation multiples being applied to THG Ingenuity sit uncomfortably with a business that from certain angles looks a lot like a logistics contractor. With investment guidance suggesting 2021 group earnings are likely to be barely better than break-even, investors have little reason now to rush in.

Rathbones goes with the flows

For those with the conviction to stay invested, or even push against the flow, the market fallout of the Covid-19 crisis has provided some rich rewards. After central banks slashed interest rates to record lows and bought assets to stave off an economic collapse, prices in many quarters surged, writes Ian Smith.

But the pandemic era has not been so kind to London’s listed wealth managers, whose job it is to attract money from individuals, charities and trustees, as well as ride the ups and downs in sentiment. Most stocks in the sector remain below where they were a year ago, with Brewin Dolphin down 13 per cent and Brooks Macdonald off 19 per cent. Rathbone Brothers has fared particularly badly, having lost a fifth of its market value over 12 months. The moves suggest the wider market does not agree with sector analysts on these businesses’ defensive qualities.

Rathbones’ 2020 update on Tuesday provided some grounds for optimism. The post-March rebound helped its total funds under management and administration reach £54.7bn at the year’s end, from £50.4bn at its start.

Fewer in-person meetings have made life tricky in the major division, investment management. Organic growth — net inflows, ignoring acquired assets — was negligible for the full year. A rush of money into its unit trust business spared management’s blushes, driving overall net inflows equivalent to 4 per cent of opening assets.

Covid does not explain everything. In the years running up to 2018, the underlying organic growth rate for the investment management business hovered between 3 per cent and 5 per cent. In 2019, this figure slumped to minus 1.5 per cent, party reflecting manager departures that were followed by client funds.

Hence the need for spending on staff and systems, and Rathbones’ subdued valuation below a five-year range of 14 to 18 times forward earnings. With this overhang, investors can be forgiven for asking where profit upgrades would come from.

A continuing market recovery, and a return to normal service for advisers, would help. So too could further acquisitions, in the ilk of the 2018 Speirs and Jeffrey purchase. In that light, the appointment of Clive Bannister as Rathbone’s next chairman is a useful one. Formerly chief executive of Phoenix Group, the pension and life insurance consolidator, he has a record of dealmaking. If Rathbones can improve flows to the core business, investors may remember their fondness for the generous margins of discretionary fund management.


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