STOCK WATCH: Books Before Beauty in ASX Shake Up

Natasha Sholl By Natasha Sholl | 01 Sep 2021

ASX-listed e-commerce companies might be experiencing record-breaking growth thanks to COVID-19 tailwinds, but ‘bullish’ investors aren’t convinced.

The last weeks of August have led to movement on the ASX, with ‘record breaking’ results announcements not always leading to lifts in investor confidence.

Booktopia shares received a boost after release of full year results, though Adore didn’t receive the same response, despite its impressive FY21. 

‘[Adore’s] share price jumped after the results and has come back down to roughly where it was prior. I think their revenue growth looks strong, the customer growth looks strong, but their NPAT was basically zero,’ said Adir Shiffman, E-Commerce Founder and Investor. ‘The bigger question with Adore centres on what level of revenue they need in order to generate meaningful profits, and how they can increase their margins. This is certainly not a question unique to Adore, it’s true for all third-party online retailers and marketplaces who sell other people’s brands. For what it’s worth, I felt like they should have bought Go-To Skincare, for me that was a logical strategic step for them.’

Perhaps part of the difference is that both companies hit the ASX with vastly differing initial public offerings. Adore’s issue price of $6.75 in October 2020 has been difficult to maintain, dropping to $3.37 in May this year. Booktopia’s initial public offering was comparatively modest, managing to stay stable throughout the year and avoiding the volatility of massive swings. 

‘Booktopia was in a position going into the IPO that the founders were the major shareholders. Our first capital raise occurred in the beginning of 2020 where we raised $8m for a minority share position. By the end of the year we listed on the ASX. These circumstances meant that we did not need to set a listing price at top dollar,’ explained Tony Nash, CEO & Founder, Booktopia. ‘The IPO share price was set with some upside left in it based on supply and demand for the shares from the institutional and retail markets.’ With shares coming out of escrow, it’s likely we’re set for a gear-change. 

Even Temple & Webster, which seemed able to do no wrong in recent times, was met with a dip in share price. It announced a ‘record’ year of revenue and profit, and initially stock surged 10.6% to $14.34. After a steady climb it closed at $14.71 on Tuesday (from $12.97 last week) but has dropped to $14.53 as at Wednesday morning. The last three months have seen the homewares company experience a massive 50.4% share price growth.

Source: Power Retail Australian Listed E-Comm Index, based on ASX reporting

‘The question at present is assessing the balance between revenue growth and free cash generation. Redbubble had a crazy results day but has risen because they ramped revenue while generating a ton of free cash ($55m),’ Shiffman said. ‘Mind you they are still a long way from their recent highs. Temple & Webster had a similar story in some ways, but bullish investors feel they can now make a case that Temple & Webster has built a sustainable brand. On the flipside, Kogan was punished for a fall in free cash and some weaker numbers. This seems short-sighted to me because despite the cut in dividends I believe their historically high accumulated inventory was quite understandable given the times, and they’re still by far the strongest brand in the space with the smartest operators and in possession of a long term cash machine. The smart investors are really trying to figure out who can generate long-term free cashflow—because many won’t—and are balancing that with the usual opportunistic short-termism associated with trading activity.’      

Last week, Kogan’s share price dropped from $13.13 to $10.93 release of its full year results. As predicted, the swift investor response has already started to soften, lifting to $11.40 at close of ASX on Tuesday. 

Cettire seemed to be relatively unheard of earlier this year, though has managed to well and truly make its mark. The Melbourne-based luxury fashion retailer reported a 304% increase in revenue in its first year on the ASX. While there were investor concerns about the nature of its business model and supply chain (resulting in a trading pause earlier this year), Founder Dean Mintz said Cettire had recently started direct partnerships with brands. Cettire’s share price received an immediate boost after its results announcement, closing out at $2.69 on Tuesday and not yet losing momentum. 

‘2021 was a tale of two halves. Many businesses rocketed in H1 and then faded badly in H2. 1H22 is an unknown quantity for most e-commerce investors and the smart ones are watching it closely,’ Shiffman said. ‘The other change is an increasing level of sophistication from investors in identifying smokescreen terms, like companies that try to explain away reduced margins by claiming it’s long term strategy to spend more on customer acquisition today. The truth is that many online retailers will see CAC rise in FY22, and pretending this is part of some grand plan makes investors cynical. Long term, I think there will be a flight to quality, which basically means reliable growth producing free cash on good margins—but it might still be a year away.’    

In the last three months, the ASX Listed E-Commerce Index has experienced 25.5% compared to the ASX200 which grew 5.2%. We know that Australia is behind overseas markets in terms of online uptake, though the pandemic went some way to supersizing this digital growth. What this means is that we’re at the tipping point. E-commerce companies well positioned for this shift online will be able to capitalise on this growth. Companies making strategic decisions to reinvest (in actual marketing strategies, loyalty programs, AI and other tech rather than reinvestments of the smokescreen variety) might show signs of slowing growth in the short term, but will lead to gains in the years to come.

Figures are current as at close of ASX on 31 August 2021. This is analysis only and not intended as investment advice.

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