Redbubble: Looking past Q1 “sticker shock”

About the author:

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

  • A culmination of a headline 28% decline in Q1 Marketplace (MP) Revenue on pcp and elevated marketing costs, saw the market shave 12% off the value of Redbubble (ASX:RBL).  
  • Whilst this topline result was 3.5% below our forecasts, the cycling of Covid-19 induced lockdown tailwinds and mask sales always had Q1 as the toughest quarter to cycle. We believe RBL has now moved past ‘peak cycle risk’ given their international exposure, ahead of domestic e-commerce players.    
  • Elevated marketing costs have partially been explained away, but remain a key concern with PAC inflation likely to continue to eat away at first purchase profitability. Herein lies RBL’s biggest threat and opportunity, with the LT investment thesis in the stock requiring improvement to repeat purchase frequency. 
  • The drawdown on the day of the result sees us maintain the Add rating with a largely unchanged (login to view). We are believers in the strategy and long term growth appeal of RBL, but do concede evidence of an ability to improve customer loyalty remains elusive at this stage.  

The quarter we had to have post reopening

A 28% decline in MP revenue in Q1 (on pcp) was impacted by heavily reduced mask sales (proving a one off benefit) and delivery date adjustments to revenue recognition. A 6% decline ex these factors (4% in CC) despite being below MorgansF, shows retention of the vast majority of gains made during the pandemic.

A sequential improvement in operating momentum (July -11%, Sept -2% adj MP rev) provides some comfort that RBL has cycled the toughest comparable period.

PAC/MP rev at 14.4% was the highest proportional spend since listing. Apple iOS changes reducing ability to attribute traffic conversion, leading to reduced PAC efficiency in Sept was a partial explanation, but PAC efficiency continues to decline (~3.0x in Q1 even accounting for the inflated spend vs 3.1x FY21 and 4.3x 1Q’21).

Below the GPAPA line, opex growth was lower than expected (flat on Q4’21) with the company guiding to opex increases yet to come. OCF 2.8x EBITDA shows the attractiveness of the positive WC business model.

Improved loyalty/repeat usage required for next stage of re-rating

Despite RBL continuing to see profitability from first sale, it is hard to envisage the company achieving their longer term goals on this basis. RBL continues to trial initiatives aimed at increasing repeat buyers (product quality, delivery, discounts) but to date has seen little change to the ~1.2x purchases pa. With less than 20% of RBL’s customers being repeat at present (vs ~50% for comparable Etsy) the scope to improve this metric remains vast. 

Forecast and valuation update

We make minimal changes to our topline assumptions with RBL continuing to guide to MP Rev ex masks slightly above pcp in FY22 (MorgansF +1% with -4%, +2%, +25% growth ex masks over the next 3 quarters). Slightly reduced GM’s (-30bps) and increased marketing costs (+60bps to 14% incl ATL marketing) have seen a 5% EBITDA decline on previous (-2.5% FY23 and -2% FY24). 

Our DCF based valuation is largely unchanged (login to view target price) with ST EBITDA declines offset by a slightly higher assumed terminal margin. Our FY26 EBITDA margin of 12.4% remains below RBL’s aspirational 13%-18%, with further evidence of increased repeat custom required to become more positive on margin upside.

Investment view

We retain the Add rating on RBL, with the result reaction again opening up some valuation support in the stock (+21% TSR). We remain attracted to RBL’s global footprint, vast fulfiller and artist network and structural e-commerce tailwinds. Our valuation gives only partial credence to loyalty initiatives, with success here implying significant upside.  

Price catalysts

We would anticipate limited marginal information at the upcoming AGM (26th Oct) with the 1H’22 result likely to provide the next ST price catalyst.

Risks

ST earnings risk is reduced but remains, increased competitive intensity, marketing cost inflation, general macro risk to disc retail, litigation & CR infringement risk.  

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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