Redbubble A tough 1H22 environment impacted margins

About the author:

Steven Sassine
Author name:
By Steven Sassine
Job title:
Associate Analyst
Date posted:
17 February 2022, 10:30 AM
Sectors Covered:
Diversified Financials

  • With Redbubble (ASX:RBL) having pre-released the key metrics of its 1H22 result last month, there was little surprise in today’s numbers. It was a tough first half overall for RBL, with elevated competitive pressures leading to higher CAC’s/margin impacts.
  • GTV, marketplace revenue (MPR) and GPAPA were all down 14%-36% on pcp. EBITDA of ~A$8m was down 84% on pcp as RBL ramped up marketing spend (PAC ~A$45M, 15.5% of MPR) and customer retention initiatives (e.g. absorbing shipping costs) as competition impacted organic channels.
  • With near term investment into platform/brand expected to continue in CY22 and higher CAC’s likely to further impact margins, we revise our topline growth assumptions over our forecast period and adjust our margins expectations lower as RBL moves through this investment phase.
  • Our DCF-derived valuation is lowered to (login to view) on the above changes offset to a degree by a revision up in our terminal growth rate from 2.5% to 3%. We retain our Add recommendation.

A tough first half

RBL had pre-released its key 1H22 metrics during last month’s 2Q22 trading update, as such, there was little surprise in today’s numbers. It was a tough first half overall for RBL with a number of elements impacting the result.

Namely, the cycling of a strong pcp performance during COVID (ex mask sales, underlying revenue was down 5% on pcp) as well as heightened competition through peak sales periods impacting organic (unpaid) acquisition. RBL ramped marketing and PAC (16% of MPR in 2Q22 vs 14% in 1Q22) to drive the topline, impacting margins. With ~60% of MPR from organic channels, increased competition will require a greater reliance of paid acquisition initiatives, in our view.

Management reiterated FY22 guidance at the 2Q22 update for MPR to be slightly below FY21 underlying MPR (i.e. under A$497m, MorgansE A$485m) and the EBITDA margin to be “negative low single digits”.

PAC/MPR of 15.5% for 1H22 was the highest relative spend for RBL since listing, with PAC efficiency seeing a decline (GM/PAC 2.4x in 1H22 vs ~3.1x in FY21). Initiatives to reactivate dormant customers and drive up the repeat rate on the platform is a key focus for management and is showing some signs of improvement (45% of 1H22 MPR from repeat purchases vs 40% in pcp).

Forecast and valuation update

With near term investment into the platform/brand expected to continue in CY22 and competition likely to further raise CAC’s and impact margins, we revise our topline growth assumptions over our forecast period and adjust our margin expectations lower as RBL moves through this current investment phase.

With FY22 guidance unchanged, we make no changes to our current fiscal year estimates. Our MPR is lowered ~2%-6% in FY23F/FY24F along with higher marketing spend estimates impacting GPAPA margins and lowering our EBITDA forecasts by ~35-53%. Our DCF-derived valuation is lowered to (login to view) on the aforementioned changes offset to a degree by an increase in the terminal growth rate used (now 3% vs prev. 2.5%).

Investment view

Whilst we retain an add recommendation for RBL on valuation grounds, we acknowledge the near term margin headwinds/acquisition cost pressures impacting the business. However, we do remain attracted to RBL’s global footprint, and vast fulfiller and artist network.

Price catalyst

3Q22 trading update in April would likely be the next data point for the company, potentially proving to be a price catalyst.

Risks

Short term margin risks remain with increased cost investment; competitive intensity impacting organic acquisition channels; marketing cost inflation; general macroeconomic risks that impact discretionary retail also exist.

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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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