Online retailer MySle (LON:MYSL) today offered up a rather worrying profit warning for its FY19 results, blaming a mix of macroeconomic and operational reasons. Reporting that peak period trading was challenging, it used the words that no investor wanted to hear: that results would be ‘significantly below market expectations’. It might be fair to say that the market has seen this coming as the share price has been on the slide all year:
That is only part of the bigger picture, and it’s been a very sad story for investors here overall. The shares were priced at 226p on IPO, so there shares have lost more than 90% of their value since then, and of course no dividends paid as it was chasing growth.
MySale won’t be familiar to many, as they operate primarily in the Asia-Pacific region. They offer an online shopping portal for a wide variety of products such as clothing, consumer goods, kitchen and toys using a traditional website format alongside a ‘flash-sale’ format. In later years the strategy has changed a little, with own-brands starting to be developed as well as a payment financing scheme. As we can see from companies such as Next, the latter can be a genuinely lucrative additional income stream if sufficient people take it up.
The RNS gets straight into it:
The group has experienced challenging conditions during its peak, second quarter, trading period, and as a result the board now believes that revenue and profits for the financial year to 30 June 2019 will be significantly below market expectations.
Some reasons are disclosed for this bad result:
The principal challenge has been greater than anticipated market disruption arising from changes to general sales tax (GST) regulations in Australia, the group’s largest market, which has been exacerbated by the product mix and an insufficient proportion of the 1P (own-buy) inventory being located in the local distribution centre.
The net effect of these items and the remedial actions are well detailed:
Revenue has also been adversely affected by selective price increases, which have now been reversed, reducing transaction volumes as price competition and comparison increased. This together with the product mix resulted in higher levels of discounting and postage promotions being deployed in order to mitigate lower demand. The challenge with the product mix arose in part because an insufficient proportion of the group’s 1P (own-buy) inventory was located in its local Australian distribution centre.
Additionally, gross profit has been affected by the product mix being overweight in categories with lower gross margins and underweight in 1P (own-buy) inventory which delivers higher margins. This imbalance was magnified by the peak trading volumes of November and higher levels of discounting. The group’s plans now assume that the gross profit percentage earned on certain product categories will permanently be lower.
Actions are being taken to restore revenue and gross margin including; changes to the product mix to remove lower priced goods in certain categories; increase the weighting of higher price-point categories and products; locating all 1P (own-buy) inventory in local facilities; sourcing more inventory from the domestic market; and reducing freight costs by centralising inventory.
And to be fair, this isn’t all bad news, as a ‘significant improvement’ in second half performance is expected, and cash has increased due to working capital improvements.
It is worth noting that the CFO left the company in October very quickly – perhaps a forewarning of this news to come. And there was no real warning, as the previous update also had a forecast of FY19 being in line with expectations and were bullish about the future. So we can surmise that things might have gone downhill fairly quickly.
The business uses underlying EBITDA as its measure of profit. The FY19 expectation in this profit warning is for a ‘small underlying EBITDA profit’, and the equivalent measure for FY18 was AUD 11.8m (£6.7m approx), so this seems a very large miss. This reporting measure actually massages the figures, as we can see from the adjustments from the last report:
‘One-off’ costs include the costs of acquisitions and integration costs. It seems that these types of items will reoccur regularly, just with different companies. In statutory terms there was actually a loss, mostly offset by a large tax benefit.
Receivables have increased at a fast rate, as a result of the new program which provides customers with a ‘pay later’ type option.
The accounts note:
This seems a bit small in opinion, but from the description there is an incentive to keep it that way, as a revaluation is rebooked to profit and loss.
The balance sheet has plenty of intangibles on it. Software costs are capitalised as such, and plenty has gone through this way – over $15m in the past two years, which seems quite high. Talking of high, there are also share-based payments seem quite unjustified given the poor performance for investors.
The last cash balance was $6.8m, a rapid decrease from the $19.0m of the previous year. However, as the trading update notes there was an improvement to this due to working capital improvements, although it is not clear to what extent this would occur. Net debt at the last statement was $6.2m of a total facility of $28.1m which is renewal every year. With that in mind and the lack of mention of covenants it seems that there is no immediate threat even if FY19 underlying EBITDA turns out to be negative.
There is a lot to consider here. The GST change is permanent and simply raises prices for goods by 10% (where previously, goods under $1,000 were exempt). This raise in price would make goods less competitive. Things are being done to mitigate this such as locating more of its goods centrally.
However, the GST somewhat hides a bigger factor, in that the marketplace is increasingly competitive. MySale have already noted that they had to reverse price increases and also introduce discounting on product and postage in order to maintain sales in an environment where there are heavy amounts of price comparison and sensitivity. That doesn’t seem likely to change any time soon, as the company have recognised in assuming that gross margins on some products will be lower. Some products are virtually commodities which are identical from retailer to retailer, such as a pair of Guess sunglasses.
Expansion into other overseas territories seems rather difficult to imagine. For example, MySale offer a UK website, but with a lead time of almost a month for some goods to be delivered (and potentially a customs charge to pay) there would have to be something very special on there to justify UK users using it. Succeeding here given their products is a matter of logistics and that seems to be a step too far in terms of cost.
One interesting aspect of the company is the OurPay solution, which is attractive to customers as it allows them to pay over 4 interest-free installments. This seems a popular option for customers and is being rolled out to other retailers and is a more integrative experience than similar offers such as Paypal.
MySale was sold as a growth story but it is difficult to see where further revenue growth is going to come from. Their trading update underlines the issues facing middlemen selling other people’s goods. The share price seems to rule out further fundraising, which means they have to start getting right, and soon. On balance I think this is not likely, although the OurPay product could have promise. 2/5.