THG (LON: THG) shares continue to fall in London this morning. A reasonable explanation for the continued drops at what is still probably better known as The Hut Group is a story in the weekend press. The talk around the marketplace is that certain producers of premium brands are limiting supplies to THG. This is not good news but it does depend upon what sort of not good news it is.
It’s worth noting that this is different from the more normal and long running concerns about The Hut Group. Those concerns which have so hit the THG share price come in two flavours. The first is just that the group seems too complex. Too many brands, too much activity going on, for it to be focused. Then there’s the uncertainty over what is happening with Softbank. Markets just don’t like uncertainty so there’s a certain devaluation of THG just because of that.
Then there’s the idea that Matt Moulding doesn’t really seem to be cut out to be the chairman of a publicly listed company. This could be unfair but impressions matter. Quite possibly an excellent entrepreneur but that’s not quite the point – the stock market as a whole responds well to certain behaviours and not to others. For example, complaining of conspiracy when some short-selling research comes out. No, not really, that’s just not what that wider market expects. Instead, explain why those short-sellers are wrong rather than complain and compose dossiers.
Today’s rumoured problem is entirely different though. This talks to the actual performance of the business itself, not to how that performance is viewed. The problem is – and it’s talk and reports, not provable documentation – that certain suppliers are limiting deliveries to THG.
One mentioned, for example, is Dermalogica, an upmarket brand owned by Unilever. We can get all technical and point out that upmarket beauty brands are Veblen Goods which really means that they’re desirable because they are expensive. It’s pretty much the same gunk in the jars, it’s the marketing, price points, and image that make them expensive and also provide the margins to pay for the marketing. So, if someone comes along and starts aggressively discounting in the retail chain the brand owners aren’t happy. Having something that’s valuable simply because it is expensive available for cheap rather destroys the very thing that is being sold.
So, as it is being said is happening at The Hut Group, folk who aggressively discount premium brands find their supplies drying up.
What then matters is why is THG doing this? If it’s just being aggressive in order to win market share well, that’ll sort itself out. Moving on to the second stage if they’re doing it to boost turnover and hit sales targets then we need to discount their revenues and sales targets ourselves – discounting to win sales isn’t a long-term strategy. Or there’s the third and nuclear option which is that they need the cashflow itself – but THG is well funded so it’s not that.
Until there’s more clarity on those supplies we might expect THG shares to remain weak. Not just whether they are in fact doing it, also not just whether normal supplies will be resumed, but why are they using this strategy? If, indeed, they are?
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Tim Worstall is a freelance writer specialising in economics and the financial markets.