Cettire: De Minimis Exemption going, going - gone
Cettire is not *immediately* dead, only imminently
Country Sad, I’m a Tariff Man
This morning Trump announced the tariffs. 10% universal, 20% on EU.
To their credit, Cettire were quick out of the blocks with an announcement. To their detriment, as is the CFO’s wont the statement was at best technically plausible but grossly misleading:
No immediate changes to the US de minimis exemption have been made in relation to EU manufactured goods. As such, shipments below $US800 will continue to be exempt from duties and are unaffected by today’s tariff changes.
Depending on your definition of immediate, it could be argued that if you fell from 30,000 feet with no parachute you are in no immediate danger of death - however your fate is still imminently assured.
Similarly, whilst the White House’s announcement of the tariffs Section 3 (h) said that
Duty-free de minimis treatment under 19 U.S.C. 1321(a)(2)(C) shall remain available for the articles described in subsection (a) of this section …
It went on to say
.. until notification by the Secretary of Commerce to the President that adequate systems are in place to fully and expeditiously process and collect duty revenue applicable pursuant to this subsection for articles otherwise eligible for de minimis treatment. After such notification, duty-free de minimis treatment under 19 U.S.C. 1321(a)(2)(C) shall not be available
For those of you struggling to keep up (hey WAM!), U.S.C. 1321(a)(2)(C) is the $800 de minimis exemption, and it’s gone as soon as they have finished building the system to collect the revenue. I do know a guy who might be able to help….
He’s not dead, he’s resting!
Once de minimis is gone, that’s Cettire’s US business finished.
However, even before that - the duties increase will impact Cettire disproportionately relatively to both the direct-to-consumer (DTC) channel and the general retail bricks and mortar channel.
The Company notes that changes to US tariffs on overseas imports will likely impact the majority of online and bricks and mortar luxury retailers, as a significant proportion of luxury items are manufactured in the EU.
Cettire is currently assessing the full implications of these tariff changes on the Company and its global operations, noting that several major luxury brands have indicated they would seek to increase pricing of luxury goods in the US market to mitigate possible tariff changes.
This is again technically accurate but grossly misleading, since it omits to mention the scale of the impost suffered by luxury brands is not even close to the same scale as that suffered by Cettire.
Gucci owner Kering operates on a gross margin of 74%, which means that even before accounting for any adaptation by the company to its transfer pricing strategy, it will be liable for tariffs of 20% of the value of EU goods when they land in the US. This means that to recover the duties impost, Kering would need to increase prices by around ~5%.
Cettire on the other hand have a product margin of around 30%, which means they would have a ~14% impost, meaning that Cettire’s price advantage would be decreased by -9% if margins were held steady.
Extending this for other listed Luxury brands for which gross margins are available, we can see that Cettire are screwed even before the de minimis’s imminent abolition.
This will also be applicable to bricks and mortar retailers who buy direct from brands after the tariffs have been paid on import at cost price.
Emerging markets to the rescue? Nup!
The Cettire announcement also calls out the “broadening of the geographic revenue base” as a potential mitigation strategy - however Cettire have never provided a breakdown of margins by country or market. Presumably this is because without a de minimis exemption as generous as the USA or Australia a drop-shipper such as Cettire doesn’t enjoy the pricing advantage of both buying in a cheap country AND a duties exemption over local retailers, thus rendering the entire exercise marginal once shipping costs are taken into account.
Valuing the cigar butt that is Cettire
As at pixel time, Cettire’s market cap is $265m. If Cettire’s US business scales back to a de minimis (geddit!) figure, the company’s negative working capital of ~$98m will consume the cash balance of $101m - before any ongoing negative cash flow from “investment” in capitalising expenses.
That seems about $260m too much?
Toodles