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The Hut Group: bid approaches forcing rally in shares, but can it last?

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The Hut Group LON:THG is a British e-commerce company providing end-to-end consumer direct e-commerce solutions for consumer brand owners. Founded in 2004, the company has grown to employ over 7000 workers and operate across 100 websites internationally, including Lookfantastic, Cult Beauty and Myprotein.

Since its IPO in September 2020, The Hut Group has seen its market cap fall from over £6 billion to just £1 billion, due to a series of negative events within the business. However, the news which has recently emerged from the company could signal a turning point in its financial market fortunes.

What has caused the recent share price surge?

The Hut Group’s share price is up 25% in the last month, and 15% in the past five days alone, but what has driven this impressive rise? The company has claimed it has received bid approaches from “numerous parties in recent weeks”, suggesting entrepreneurs view the company as a profitable investment opportunity.

In addition to receiving takeover bids, The Hut Group has recently reported sales growth to 35% to £2.2 billion in the last year, in line with City forecasts. Furthermore, first quarter results showed a 16% jump in revenue to £520 million.

Upon announcement of these results, Matthew Moulding, founder of the company, said it was a strong performance that was ahead of targets set when The Hut Group went public a year and a half earlier. He singled out the strong performance of ingenuity, a division building direct-to-consumer websites for other companies, which has been a key part of the company’s growth plans.


The Hut Group’s investment prospects

As a factor which could turn out to be decisive in determining The Hut Group’s share price performance over the next few months, all eyes will be on the firm’s financial short-term successes. If the company was to again announce positive earnings reports in the upcoming quarters, or declare further successful takeovers, The Hut Group’s stock would be in even higher demand.

It is also important to note that 80% of The Hut Group’s sales come from repeat customers. This suggests that the business and its subsidiaries have a loyal following, something that could turn out to be extremely valuable given the current inflationary circumstances in the UK economy which are threatening the operational success of businesses within the e-commerce industry.

On the other hand, as with all stocks, The Hut Group’s risks must also be considered. Perhaps the most prominent risk to institutional and retail investors concerns the company’s profitability. Although the recent financial report represents a step in the right direction for the company, sales growth was unfortunately not matched by profit growth.

The Hut Group’s adjusted cash earnings (EBITDA) rose by only 7% to £161 million. That gives an adjusted EBITDA profit margin of 7.4%, down from 9.3% in 2020. Worse still, the business remains loss making at an after-tax level, with a reported loss of £138m for the year just ended.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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