Redbubble: Not yet through the trouble, but backing the bubble

About the author:

Anthony Porto
Author name:
By Anthony Porto
Job title:
Senior Analyst
Date posted:
20 August 2021, 8:00 AM
Sectors Covered:
Online, Emerging Tech

  • Redbubble's (ASX:RBL) FY21 result came in slightly below forecasts (-0.8% Marketplace rev, -1% GP and -2% EBITDA). Given quarterly reporting, the quantum of the miss in the 4Q was a degree higher (-5% at MP Rev and GP lines, -40% EBITDA on small no.)
  • The magnitude of near term downgrades we have put through our forecasts, the 39% intraday movement in the stock, and a likely near term retreat as short covering abides, has still not dissuaded us from moving to an Add rating.
  • Whilst the worse may be yet to come, we are taking a longer term view, being believers in the earnings and growth potential of the RBL platform. Our DCF derived valuation reduces 11% to (login to view).
  • We remove the 10% discount previously applied based on near-term earnings uncertainty (with this hopefully having played out) with our target price down only 1% on previous.

Q4 shows difficulty in comping COVID tailwinds, but also some resiliency

RBL’s FY21 result of MP Rev $553m (+58% on pcp, +70% in constant currency) GP $223m (+66%, +79% CC) and EBITDA of $52.7m (+605% on pcp) showed the benefit of COVID tailwinds (both to e-comm in general and mask sales specifically).

The severe deceleration seen in Q4 (-6% MP rev on pcp, -8% GP and -76% EBITDA) shows the perils of cycling these tailwinds and an artificially depressed cost base (both opex and marketing spend).

Despite this, the Q4 result excluding mask sales (a hopefully no truer one-off benefit) of MP rev +0.7% (+6% CC terms) was actually a commendable performance (25% 2yr CAGR).

RBL has hinted at capital management initiatives ($99m cash, $56m ex WC). With dividends being ruled out, a buyback or acquisition are the obvious choices.

Some slight inklings of improving loyalty but long way to go with PAC efficiency continuing to decline

Repeat purchasers @ 42% of MP rev (in line with FY20) was commendable in the context of 40% customer growth (to 9.5m). Repeat purchase growth of 67%, outstripping first purchase (+52% on pcp) and the oft quoted 1.1 transactions per customer lifting to ~1.19x (past 18mths) provide some evidence of increased loyalty.

RBL remains heavily focused on this (read investment).

The above becomes increasingly important with the brief hiatus to RBL’s lower PAC efficiency trend (PAC ROI) continuing it’s downward trajectory (refer body of note).

ST brings eyewatering downgrades, LT we remain well below RBL’s upwardly revised targets

The leverage in RBL’s business model (that served it well on the upside) has conspired to see large downgrades to our near term forecasts. We show our forecast changes in more detail overleaf, but for FY22, a 10% topline reduction has seen a 30% EBITDA reduction (with 2% increase in opex on prior).

RBL has reaffirmed aspirational CY24+ targets of $1.25b MP Rev, upgrading LT margin expectations (now 13-18% vs 10-15% prev). Our forecasts sit well below these targets, with attainment of the midpoint implying an EBITDA profile 3.7x FY21 (6.8x FY22F) and RBL trading on 4.8x Adj EV/EBITDA (albeit in CY24+).

Back to an Add rating

Despite acknowledging moving back to an Add rating whilst delivering some large near term earnings downgrades may appear incongruous, we believe with expectations rebased, and being closer to exiting the period of maximum comping risk, RBL is now in a position to begin rebuilding momentum.

We remain believers in the LT growth profile of RBL, not to the extent management’s targets would imply, but enough given the rebasing in the stock (- 50% from Jan highs and -14% from when we put the stock on a Hold).

Price catalysts

1Q22 earnings update (generally mid Oct) although we anticipate this to represent peak cycling risk.

Ability to show increased customer loyalty and payback of expected increased spend on loyalty initiatives.

Risks 

Near term earnings risk remains with a declining topline and increased cost investment, increased competitive intensity, marketing cost inflation, general macro risk to discretionary retail, litigation risk (eg Brandy Melville case).

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