Image source: Getty Images It is hard to believe it is less than a year and a half since THG (LSE: THG) listed on the stock market, jumping 30% during its first day of trading. The dust has long since settled and the THG share price has collapsed by 93% since then. Can it ever recover? THG faces ongoing business challenges A share price is not always linked to the performance of the business. But, long-term, it is hard for a share to do well if the business is struggling. In some ways, I do not think THG is struggling. It announced yesterday revenues grew 3% last year. That is not strong growth, but it is positive. The company’s much touted Ingenuity digital platform did even better, with revenues moving up 7% from the year before. Sales are one thing though. Profits are another. That is where THG seems to be struggling badly. Yesterday’s statement did not give detailed earnings information. But at the interim stage, the company reported a £106m loss. That was a 30% jump from the already substantial £82m loss the company reported for the same six-month period last year. Action plans in place THG is taking steps to address its challenges. It is trying to focus more on areas where profit margins are attractive and has already discontinued some lossmaking activities. The nutritional supplement, beauty and luxury goods retailer is slimming down its workforce substantially. All of those things are steps in the right direction, although overdue in my opinion. Despite the positive moves, I continue to see THG as an unimpressive business due to its lack of profitability. After eliminating certain activities, the company forecasts “adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) on a continuing basis of c. £100 million” this year. Such complicated financial metrics are a red flag to me as an investor. In the first half, for example, THG’s adjusted EBITDA came in at £32m. But its statutory loss was £106m. So although the headline profitability outlook sounds promising, at the statutory basic earnings level I expect the result to be far worse. Big task ahead To get back even to where it stood a year ago — let alone its much higher flotation level — the THG share price needs to more than triple. Can it do that? In principle I think it could. The company continues to grow revenues, while its cost-cutting could help boost profitability. I think the Ingenuity platform has promise, although it is hard to quantify that in financial terms. The shares might not recover though – and if they do, I expect it to take a long time. THG’s credibility in the City is weak. I think it continues to be harmed by a lack of detailed financial data (such as profitability) on some key areas of the business. The company remains massively lossmaking. It has not yet proven it has a viable business model that can be profitable over the long term. I think a lot has to go right for the THG share price even to have a decent chance of recovering. So far, at least, I lack sufficient confidence in the firm’s management or business strategy to see that as a probability and not just a possibility. I will not be buying the shares.
