“In a world of e-commerce, Cettire Ltd finds itself in a precarious position.” This is the exact words from financial research firm Ord Minnett, which, despite the less-than-projected FY24 guidance that the online luxury platform shared on Monday, is recommending investors buy at a target price of $2.60.
At time of writing, Cettire’s shares are at $1.10, more than 50 per cent down from its recent peak level of $2.24 last week. In the last year, the luxury platform’s shares have been as high as $4.80, and have conversely been as low as $0.38 recorded in mid-2022.
According to Ord Minnett, Cettire’s expected earnings before interest, tax, depreciation and amortisation (EBITDA) for the second half of FY24 was a staggering 62 per cent below expectations, with the fourth quarter yielding virtually no EBITDA compared to the $32 million year-to-date.
“This downgrade was primarily driven by margin factors, including gross margin and marketing," Ord Minnett wrote. "Cettire attributes this to ‘aggressive competitor clearance’, suggesting a temporary setback.”
Ord Minnett claimed that while it is tempting to view this as a cyclical downturn, particularly given Cettire’s recent change in pricing policy and media inquiries into its business practices, “it’s prudent to exercise caution”.
Over the last few months, Cettire’s duty payment processes have been called into question, as well as allegations of selling non-genuine products.
Despite the company trading well in terms of forward estimates, Ord Minnett reported its confidence is “somewhat shaken”.
“We are waiting for evidence that these recent issues are indeed temporary, which could take time,” the firm wrote.
The fourth quarter of 2024 saw Cettire’s sales fall short of expectations by approximately 4 per cent. However, this still represents a year-on-year growth of 53 per cent and continued market share gains.
“The real concern lies in the margins,” Ord Minnett wrote, adding that Cettire’s EBITDA margin for the fourth quarter was a mere 1 per cent, significantly lower than the expected 6.7 per cent.
This was likely due to a higher marketing-to-sales ratio of around 11 per cent and a lower delivered margin of 17-18 per cent.
Amid the trading update, Cettire pointed to intense competitor discounting, particularly from MatchesFashion, which is recently in administration, with responses by Farfetch and SSense.
“While we agree that some of the impact is temporary, the magnitude and timing raise questions about potential structural risks following Cettire’s pricing changes and the recent media inquiry into duties.
“Cettire, however, suggests otherwise, stating that high-value US sales outperformed low value. This is something we will continue to monitor.”
Looking ahead, Ord Minnett is assuming that most of the current issues are cyclical, but added the timeline for their resolution remains unclear. In the near-term, the firm has reduced its FY25 estimate of Cettire’s EBITDA by around 79 per cent to reflect the continuation of recent issues, implying a sales growth of around 32 per cent and an EBITDA margin of 1.3 per cent.
“In the medium term, we forecast a ‘snap-back’ in FY25/26 to EBITDA margins of 4.7 per cent and 5.9 per cent, respectively, which are below our previous estimates of around 7 per cent."
If its view proves accurate and most of these current issues turn out to be cyclical, Ord Minnett claimed investors are paying a very cheap price for a stock growing very strongly, based on its current estimates.
“If these issues are structural, then it is a different matter, as Cettire’s valuation has little ‘room to move’.
“We believe that some issues are cyclical and that Cettire will emerge with a higher market share as competitors falter. Given increased, however, we moderate our faith until further positive signs emerge.”