Cettire: I was wrong
Cettire FY25 = Cettire FY23 less the scams
I wanted everything for a little while
Having been vocally critical of Cettire, when the stock rallies nigh on 80% in a day it would be foolish not to acknowledge the possibility of some kind of error in the analysis.
Indeed it would be churlish not to acknowledge the fact that perhaps even for the first time someone made money from buying a recommendation of friend of the show and POI Julian Mulcahy, even if that person was the founder. So props to Julian!
Right right right right wrong… right?
So what was so wrong in my analysis that led to this extraordinary (unprecedented?) rally?
Well two-fold. Assigning too low a probability to an auditor refusing to sign off on accounts for two months then miraculously deciding late in the third month that they would in fact sign off. This is ISX auditor Grant Thornton we’re talking about here so fool-me-once shame on you, fool-me-twice shame on me.
The second failure was the lack of imagination to conceive that over the course of three months a stock could
announce a massive profit warning
miss even deflated expectations at its financial year result
end up in dispute with its auditor resulting in unaudited accounts
disclose a $10m purchase of stock at $3.85 after a founder sell down for the employee trust as “seasonal variations” at the Q3 result and shrug it off at the FY result
have the US announce a crackdown on the de minimis loophole on which CTT’s profitability has depended as a drop shipper
then end that three month period valued higher than when it started on the basis of a founder induced short squeeze and the same auditor with a difficult history changing its opinion. For those that showed such imagination, one can only salute and ask which bridges are up for sale.
Stretch a little bit
More on the auditor later, but first let’s actually look at the accounts that were belatedly signed off upon to see if we can glean any intel about what - shorn of any one-shot-kill risk we’re actually buying.
Pick a number, multiply by 35.2%
The accounts give a point-in-time snapshot of Cettire’s business through two line items: Contract liabilities and inventory. The latter represents the COGS of the goods in transit whilst the contract liabilities represent what the same goods have been sold for. So reasonably if you divide one by the other you should arrive at what used to be disclosed as product margin! Where there’s a will there’s a way.
Now these line items have been closely scrutinised by Grant Thornton, since they formed part of their assessment of whether Cettire were agent or principal for revenue recognition, so they must be correct.
So what are these contract liabilities (revenue) as compared to their inventory (COGS)? Let’s divide one by the other:
It would appear that to SEVEN significant figures, Cettire’s product margin over the end of the period was 35.2%, just as it was at the end of the first half of FY24 and just as it was at the end of FY23.
Surely GT wouldn’t let such an obvious plug figure slip by? Surely Grant Thornton would investigate this? Or alternatively, Cettire’s margins are unchanged and it’s just their revenues that have dropped back to zero YoY growth?
Growth company?
Assuming these figures weren’t just made up and waved through by a supine auditor, we know that in the lead up to the end of the financial year, a time when Cettire had a 10% sale on, that their sales were identical to FY23 representing year on year growth of precisely zero - whilst according to the company they still maintained a product margin (COGS/Gross sales revenue) of 35.20000%. (sic)
This in a company that paid out on 77% revenue growth for the incentive scheme, and paid out on “adjusted EBITDA” growth of 11% only once removing costs they’ve since accepted as ongoing.
Auditing the Auditor
Whilst it’s clear the auditor attempted to address several of the issues raised in out KAM post, not only were several issues left unaddressed but on a careful examination of the auditor report even those issues which were addressed fall short of a clean bill of health.
On duties, it would appear that rather than confirming that Cettire has paid across the duties it has collected to the authorities, it has agreed that after input from a management appointed expert that there’s insufficient basis to record a contingent liability under AASB137, somewhat short of a bill of health.
Under Grant Thornton’s methodology, one could find that Cettire had underpaid duties by a large amount and yet if they were convinced by an ‘expert’ that CBP are bad at collecting them then there would be no need to record a contingent liability:
Reviewing management’s assessment and external expert (specialist US expertise) advice of any exposure in relation to customs duty and import taxes in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets;
US expertise comes in handy here!
As it does when it comes to First Sale For Export (FSFE) rules and their interaction with the $800 de minimis threshold in the US. As we know that our coat’s value was underdeclared at customs, it follows that either Cettire committed undervaluation fraud or they used FSFE inappropriately and also committed customs fraud.
Engaging auditor internal and external experts (including, inter alia, specialist US expertise) due to the complexities in legislation to verify that the valuation methods applied in calculating the customs duty and import taxes on sales transactions is reasonable and in line with the relevant laws and regulations for the relevant countries;
GT also failed to address:
Presumably because there were no good answers here. All good, we will find out at the AGM!
Either; or; both
The truth is that the bear thesis for Cettire never rested on whether Crystal signed off on the accounts, nor whether she decided that duties scams past present or historical were worth disclosing in the accounts. Though these were one shot kills for Cettire that even the most enthusiastic supporters would have had to accept killed the Cettire bull thesis.
The bear thesis was that either Cettire were investigated and shut down, or that by changing their checkout to be duties inclusive their CAC would increase and their sales would fall - or both.
This means that the bull thesis is now that Cettire is compliant enough not to get caught, whilst their increased CAC and expenses are temporary when in the last quarter margins were negative in exactly the way the bears predicted - and even then it’s not cheap.
On second thoughts, I’ve had my lobotomy - get. me. in.
Returns fees - how much are Cettire making from them? Is it more or less than 5% of net revs and therefore all of their adjusted EBITDA margin?