where’s that golden share now it’s needed?

Another year, another disappointment from THG PLC (LSE:THG), the e-commerce group that floated in London to great fanfare back in September 2020.

It floated at 500p a share, which gave it a market capitalisation of £4.5bn. Today’s disappointing update, which saw the retail group warn that margins this year would be between 7.4% and 7.7% rather than the 7.9% the market had been expecting, prompted another bout of selling in the stock, which now trades at 169.2p, giving it a valuation of £2.3bn.

READ THG shares fall again despite sales growth forecast

How did we get from there to here?

First, let’s address why THG, formerly known as The Hut Group, was valued so highly when it listed.

Although characterised as a retailer focused on beauty and nutrition products, the “secret sauce” for THG was Ingenuity, its end-to-end e-commerce platform that was supposed to prove irresistibly attractive to companies that have blockbuster brands.

The City of London, smarting from its inability to attract genuine world-beaters in the field of technology – there is Ocado Group PLC (LSE:OCDO) and not much else these days – was keen to buy into THG’s story that it was set to be an e-commerce titan.

The London Stock Exchange even allowed founder Matthew Moulding to retain a “founder’s share” that would allow him to block unwanted turnovers, as it had done with the founder of Deliveroo.

Some observers carped that annual revenue from the Ingenuity division at the time of flotation was just £61.4mln, which is not a sum that is going to cause Amazon.com, eBay or Shopify (TSX:SH., NYSE:SHOP) sleepless nights.

Revenues from the group as a whole clocked in at £1.14bn in 2019, up from £80mln in 2010, while profits were around £111mln, meaning the company was valued on 40 times annual earnings. An earnings multiple of that magnitude elicits suspicion in some investors and enthusiasm in others.

For a while at least the enthusiasts held sway with the shares rising more than 50% in the two months following the initial public offering. Moulding’s incentive scheme reportedly included a target to achieve a 50% increase within three years (from which he would trouser £700mln); the shares had hit that target within three months, never mind three years.

I didn’t get where I am today by being conventional

Here was a company that looked like it might give the US technology companies – typically run by megalomaniacs indulging in shall we say dubious business practices – a run for their money.

In its early days, The Hut Group specialised in selling CDs (compact discs) online from Guernsey taking advantage of a tax loophole so obvious that even former Chancellor of the Exchequer George Osborne noticed it, despite Moulding being a major donor to the Conservative Party.

THG even had a bit of form in terms of overvaluing…