Jeff Bezos started with books and hit the eCommerce Bull’s Eye. Matthew Moulding started with CDs, then had to radically reinvent himself and has since been writing a story of resilience and adaptability for the past 17 years.
Founded in 2004, The Hut Group, now known as THG plc, is a prime example of intelligently using the current liquidity environment to carve out an attractive long-term market position.

Run-Up

In 2004, former management consultant Matthew Moulding and his colleague John Gallemore founded The Hut Group to sell CDs on the Internet. After the industry began to disintegrate due to the confluence of Napster and iTunes, THG started looking for diversification opportunities. Direct-to-consumer business models, however, should remain the focus. The next big vertical was opened with the online prestige cosmetics retailer “Lookfantastic”. THG acquired it in 2010 for just under GBP 19 million. One year later, THG expanded its spectrum with the takeover of the protein powder mail order company “MyProtein”. The acquisition cost just under GBP60 million and laid the foundation for the “Nutrition” vertical. THG is able to roll out relatively small brands and platforms globally. This D2C expertise started to attract outside brands that are either too slow or incapable to convert their organizations to digital distribution channels. THG began setting up whitelabel websites for retailers such as Tesco and Asda.

Since inception, THG has completed more than two dozen acquisitions. THG follows an incremental approach, and it typically adds new building blocks around the three major pillars of Beauty, Nutrition, and Ingenuity (the D2C services platform). In Beauty, for example, this includes acquisitions of additional distribution channels such as the U.S. online platform “Skinstore” (2016), the subscription model “Glossybox” (2017), and also a global Spa chain called “ESPA” including its own product range (2017).

Ingenuity is also constantly being expanded with new tools. These included the content studio “Hangar Seven” (2017), the web hosting company “UK2” (2017), and the translation service provider “Language Connect” (2018).

Status Quo

THG is constantly transforming and it is not always easy to thematically fit the new acquisitions into the existing pillars of the business model. In its 2020 annual results presentation, dated April 15, 2021, THG itself communicates four business segments:

Beauty

This includes the distribution channels “Lookfantastic”, “Skinstore”, “Dermstore”, “Glossbox”, “ESPA”; various own brands such as “Illamasqua” (2017), “Eyeko” (2018), “Christophe Robin” (2019) or “Perricone MD” (2020); and even contract manufacturers such as “Bentley Labs” (2021). Just under 50% of the private label brands are produced in-house as well. With the recent acquisition of “Bentley Labs”, this share is set to increase.
Most recently, the segment served 6.9 million customers with a repurchase rate of slightly over 80%. More than 500k customers are even beauty box subscribers. In 2020, the segment generated GBP 752m in sales, with an annual increase of 53% over the last five years.

Nutrition

THG’s core asset is its nutritional supplement brand “MyProtein.” The protein powder was placed in the minds of potential customers early on via fitness influencers. “MyProtein” has a market share of just under 15% in the UK and Western Europe, according to management, which is an amazing position in a fragmented market like protein powder. 80% of “MyProtein” comes from its own production and THG is also pushing ahead with vertical integration here. In 2020, the flavor manufacturers “Claremont Ingredients” and “David Berryman” were acquired. In 2021, THG additionally entered the cereal bar business with the acquisition of “Brighter Foods.”
Most recently, the segment served 6.3 million customers, with a “MyProtein” repurchase rate of 84%. In 2020, the segment generated GBP 562 million in sales, with an annual increase of 27% over the last five years.

Ingenuity

The segment was redefined in the 2020 financial statements. Basically, Ingenuity can deliver various services for customers. These include website creation and hosting, localization (translation and adaptation to local market conditions), providing an online store, fulfillment, marketing with in-house influencers, production, and even development of completely new brands. The segment generated GBP 137.3 million in revenue in 2020 and counts brands such as L’Occitane, Dulux (Akzo Nobel) and Microsoft among its clientele. Ingenuity is an attractive business model itself, but presumably also serves as a due diligence instrument and test laboratory to identify new takeover candidates or optimize the company’s own activities.

Other and OnDemand

The segment is either a pile of leftovers or an optionality basket. In its 2020 year-end presentation, THG renamed the segment into OnDemand, focusing primarily on the “Zavvi,” “Pop in a Box,” and “IWOOT” brands. “IWOOT” (“I want one of those”) is an online store mainly to provide gift inspiration. “Zavvi” and “Pop in a Box” are also niche online stores with collectibles related to movies and video games. It’s a surprisingly profitable niche in light of where Gamestop generates profits and the recent product range expansions of Mediamarkt and Saturn. The segment generated GBP 101.3 million in sales in 2020.

Toolbox

With all the different business units, an aggregated view across the entire organization is helpful to understand what Moulding has created over the last 17 years. Vertical integration has given THG a comprehensive toolbox for the next generation of eCommerce. THG now includes 6 manufacturing facilities, 18 warehouses and fulfillment centers, 31 data centers, and 19,000 associated influencers. As a result, the company serves a customer database of 31 million people and generated 900 million website visits in 2020.

THG also operates two luxury boutique hotels and a “country club” that are, among other things, a scenery for influencers.

Strategy

THG acts like an opportunistic financial investor, but can often exploit synergies or cross-selling potentials via its existing footprint that are otherwise reserved for strategic investors. CEO Moulding has a clear preference for industries where structurally high gross margins are achievable. The verticalization strategy is aimed at steadily expanding the accessible margin.

In the process, acquisitions sometimes seem somewhat “far out of the box” and overpriced, and the acquisition logic only reveals itself years later. A prominent example was the acquisition of “Glossybox”, a subscription model where cosmetic samples are sent out monthly. The business model was ridiculed by many (including the author), but has since evolved into a useful customer acquisition model with 515,000 subscribers. “Lookfantastic” and “Dermstore” also offer subscription boxes. Glossybox is self-sustaining with an EBITDA margin of around 10%. If the strategic effects do not materialize after an acquisition, THG is patient enough to park a business model in the “pile of leftovers” and possibly integrate it more meaningfully at a later stage.

People

Both management and supervisory board are excellently staffed. In addition to the founders Matthew Moulding (49 years) and John Gallemore (52 years), we are pleased to see that the two most important verticals Beauty and Nutrition are led by two women. Rachel Horsefield has been with THG for 9 years and has been CEO of the Beauty division for 4 years. Lucy Gorman has been with THG just as long and has been CEO of the MyProtein brand for just over 3 years. The board of directors includes Zillah Byng-Thorne, chairman of the listed media group Future plc, and CVC partner Dominic Murphy (previously a partner at KKR for 12 years).

Numbers

THG has issued explicit growth targets for its individual verticals. In 2021, the beauty segment should achieve the one billion annual sales milestone and thus account for more or less half of the company’s sales. In the medium term, THG is aiming for 25% growth in the beauty segment. Driven by great potential in Asia, the nutrition segment is also expected to grow by 20% p.a. Annual growth of 40% is targeted for Ingenuity. On an aggregated basis, THG calculates 20-25% annual growth at group level. Up to GBP 250 million is to be invested annually in acquisitions. Basically, the entire free cash flow is invested to expand the market position. Adjusted EBITDA is expected to remain at 9-10%. Structurally, however, the verticals offer higher margin potential. US prestige beauty competitor “Ulta” with significant brick-and-mortar exposure achieves EBITDA margins of over 15%. In the long term, this should also be possible for THG Beauty. The margin potential of “MyProtein” should be similarly attractive due to the vertical integration.

Valuation

Douglas CEO Tina Mueller recently said on the OMR podcast that she would like to see a valuation for her company in the direction of 5x sales. That means she could easily buy THG’s online pure play business for GBP 3 billion (i.e. 3x sales) and it would still be accretive.

The Nutrition segment is much more concentrated and has a strong brand in “MyProtein”. (53% of sales come through “free” marketing channels like SEO). Nestlé’s recent acquisition could serve as a valuation benchmark. In April this year, the acquisition of “The Bountiful Company”, a nutritional supplements manufacturer, was executed at 3x revenue and 17x EBITDA. The valuation of THG’s Nutrition segment should thus implicitly be between GBP 2 – 2.5 billion.

The “pile of leftovers” is more difficult to value due to its fuzzy profile. However, if the individual assets were broken up, it would presumably be possible to realize GBP 250 – 500 million.

The wildcard Ingenuity is binary as a valuation component. Cash is still being burned in this segment due to growth investments and in a conservative scenario, no value should be attributed to the business model. However, there are first indications. Notorious investor Softbank already knocked on THG’s door and wanted to invest directly in Ingenuity. But there was not yet a clearly defined legal entity that could have accepted the investment. Therefore, Softbank invested USD 730 million at THG group level and secured an option to invest USD 1.6 billion in Ingenuity once the legal entity for it was created. In return, Softbank would receive a 19.9% stake in Ingenuity, representing a valuation of USD 6.3 billion, or just under GBP 4.5 billion. It is possible that Ingenuity will subsequently be listed separately, which would uncover the valuation.

So when you add it all up, the enterprise value ranges between GBP 5.25 and 12.5 billion. Currently THG has no net financial debt. So broken down to a single share, the valuation is somewhere between GBP 5 and GBP 11. Most recently, the stock was trading around 6 pounds.

There is one factor weighing on valuation at THG. Matthew Moulding has a so-called “golden share” that can be used as a veto over unsolicited takeover attempts. This fact means that THG cannot be included in the FTSE100, and thus sees a lot of ETF capital flow past it. The golden share suits Moulding; he wants to stay in the driver’s seat for the long term. In a mid-2020 interview, he was asked what his goals were with THG. His answer:

“All I intend on doing is building The Hut Group into something that stands out over the foreseeable future. I don’t see an end to that. I don’t think about it. So, billions and billions of revenue is your answer. But how many billions and billions?”

 

***

Please consider our disclaimer regarding customer information