2025Q1 update - Bunny required
Return to sender
As the Earth continues to spin on its axis through spring/summer into fall/winter season and the market still giddy from the achievement of an ASX300 company managing to persuade iSignThis auditor Grant Thornton to sign off on its accounts, we rush headlong into Q1 update territory. It’s probably not going to be great so if form is any guide we will have a big announcement of something to feed the chooks - but after the fizzle of the China launch what rabbits are left to pull out of the hat? Suspicions below….
Dis Spell deez
After a volatile reporting season, Cettire's share price shot up 78% over the month of September. There were two key catalysts over the month, the first being an announcement of the CEO buying shares on market, a signal that he thought the share price was undervalued. The second catalyst was the release of Cettire's audited financial accounts which dispelled the bear thesis on duties. These catalysts coupled with the high short interest also caused a short squeeze in the stock.
Regal Emerging Companies September 2024 Update
Whilst it’s hard to dispute the volatility or the monstrous short squeeze and we can debate the conclusions we can draw from the price-insensitive on-market buying spree from the founder, Regal must be using some other definition of ‘dispelled’ as to the bear thesis on duties which has played out in spades. As a reminder, the auditor only deemed that any liability to historic underpayment of duties was insufficiently likely to be collected by CBP to record a contingent liability which is not the same as dispelling the bear thesis that duties revenues made up a significant part of past profits.
It also doesn’t change the fact that by changing the checkout so duties are no longer charged separately, the higher prices have increased CAC and reduced sales growth even whilst Cettire presumably continue to mistakenly use the FSFE rules to pay zero duties when the reduced value is less than USD800.
It’s not the first time that Regal have publicly misstated items in Cettire’s accounts and it’s hard to see it as coincidental.
2025Q1 preview
Historically this has been Cettire’s slowest quarter, averaging around 17% of FY net revenues, so perhaps the consequences for for this update should be of lower import. However Cettire have been managing the business for profit rather than growth so we should at the very least be expecting a large uptick in margins from 2024Q4 when even after backing out various one-offs that now appear to be ongoing, delivered margins were ~17.5% against the pre-duties inclusive pricing change average of ~23%.
The company told us at the FY24 result that:
Sales revenue for July and August 2024 was tracking about 20% higher year-on-year.
Refund rates are improving in Q1 FY25 compared to FY24
Marketing spend as a percentage of sales revenue is lower in Q1 FY25 than in FY24
Adjusted EBITDA is expected to be positive in Q1 FY25.
Now we had Q1 FY24 adjusted EBITDA of $8.7m on net revenues of $127.1m, so with a decreased marketing spend and revenues increasing ~20% if Cettire’s margins aren’t permanently impaired we should really be expecting an increase in EBITDA, not just an EBITDA over zero.
She wrote upon it…
What is more interesting is that Cettire have changed their description of net/gross revenue from Returns rate to Refund rate. This is reasonable given that Cettire charge returns fees, meaning that this metric isn’t actually a returns rate at all - that would be much higher! Since Cettire simultaneously introduced returns fees once they could no longer cling onto the duties they had charged the customer (but probably not paid to customs), the deviation between returns and refund rates must have increased significantly.
However Cettire did previously offer free returns during FY22, when the return/refund rate averaged about 27% of gross revenue. During the prior period of H1 FY21 and the subsequent periods when Cettire charged USD25 returns fee and held onto ‘duties’ in FY23 and 1H FY25, the refund rate dropped to around 23%.
This means that the various returns fees must have amounted to 4% of gross revenues or around 5% of net revenues - which was their entire pre tax margin.
Subsequently with a USD25 returns fee and an $50 fee for items over $800, the refund rate was around 25% in Q4. Cettire are running out of levers to pull, which is probably why they’ve increased the returns fee to USD28 recently. No wonder the refund rate is lower when they’re taking more money out of the refund!
Opex for days
Given Cettire churn around 2/3 of their customer base each year, without continued investment into customer acquisition the 20%+ compound growth expected by the market will be tough to achieve.
Indeed having hired multiple new management types who are presumably receiving significant danger money, fixed costs are no longer low to zero even if Cettire will continue to boost accounting “profits” by capitalising everything in sight, claiming every expenditure as R&D whilst spaffing company coin on Claytons buybacks for the employee trust but adjusting away share based compensation as non-cash.
Having squeezed spectacularly off the lows to a once again eye-watering billion-dollar-adjacent valuation it’s hard to imagine a partial recovery of margins will be enough to gird the loins of even the more excitable growth investors.
SHOW ME THE BUNNY
All of this ghastly negativity suggests that Cettire will have a bunny to extract from their fez - much like the abortive China launch was supposed to be. So after Zegna were wheeled out for multiple Australian investor calls are we back to the multiply-previously-announced brand partnerships?
Well maybe. But looking at the other announced direct brand relationship with OTB/Staff International, their brands already represent one of the most stocked items on the Cettire website with over 122k available inventory items - but the most stocked items are Diesel kids’ sweaters (or maybe coats?), which are unlikely to be moving in large volumes, despite the vast quantities of stock available to sell.
This exposes the problem with direct brand relationships - whilst you get the depth of inventory, it is by no means guaranteed that the inventory you get will be hot. However what you will definitely get is brand interference with your pricing strategy, and as we all know the only reason to buy from Cettire is price.
On the assumption that Cettire are about to announce an upgrade to their Zegna partnership 2 years after it was first announced, perhaps that would go some way to explaining why so many of the Zegna products on the Cettire website are no longer showing as discounted, even if they are still are sourced from the boutiques and discounted. If Cettire selling discounted product without a comparison price is the compromise Zegna have accepted then it says more about Zegna than it does about Cettire!!
However full priced Zegna items have also started appearing on Cettire’s website over the weekend, including such fineries as a $1395 pair of trousers with large quantities of stock available. Quite why you’d buy from Cettire who charge a returns fee when you could buy direct from Zegna with free shipping and a 30d free return window for the same price goes some way to showing how utterly ill-conceived and pointless this is.
But maybe it will distract from the numbers?
What of it?
So in a world where Cettire are no longer growing, the much vaunted negative working capital must inevitably start to unwind. At the end of FY24, Cettire’s payables reached $94m, and the negative working capital had increased by $33.3m YoY. With sales decelerating into year end like a stolen Porsche into a wall, the $79m cash pile will have been eaten into significantly. If we take the 20% revenue growth from the FY24 result guidance, then all else equal you’d expect cash to drop by around $15-20m.
And even in this Panglossian case where revenue growth is 20%+ despite lowered marketing, simultaneously with 6-7% adjusted EBITDA margins, friend of the show Ari reckons it could be worth as much as… $2.20/sh
Cettire trades at $2.39. What a world!