Shopping for luxury returns – A look into Cettire

Cettire (ASX: CTT), was launched in 2017, and is a global online retailer, offering more than 2,500 luxury brands and 500,000 personal luxury goods via its website, cettire.com.

The rapidly growing luxury e-commerce platform is not short of competition. Net-A-Porter, Gilt and Farfetch are global luxury goods e-commerce platforms that immediately come to mind. These companies have endured the global slowdown in luxury goods sales and some idiosyncratic issues. Farfetch’s share price today is 97 per cent below its highs thanks in part to the slump in global luxury goods sales and a product returns model that causes the company to lose money. Cettire does not have this same returns model.

For the 2023 financial year, Cettire reported sales of $416.23 million, a 98 per cent jump compared to $210 million a year earlier. Net income was $16 million compared to a net loss of $19 million in 2022. These numbers were achieved with just 50 employees and stand in stark contrast to the zero-revenue generated as recently as 2018.

But these growth numbers, as impressive as they are, have slowed from when the company first made their initial public offering (IPO). According to the prospectus for its IPO, Cettire’s sales between March and June 2020 grew 331 per cent from 2019, suggesting an element of the growth was aided by COVID-related lockdowns.

Nevertheless, because Cettire is significantly smaller than peers such as Farfetch, and is therefore coming off a lower base, its first quarterly trading update for FY24 revealed continued strong growth. The company reported gross revenue of $167.4 million, marking a staggering rise of 98 per cent year-on-year (YoY) from the same period a year earlier. Net revenue trailed slightly behind, yet was equally impressive at $127.1 million, up 92 per cent YoY (more on the difference between ‘gross’ and ‘net’ revenue below). Earnings before interest, taxes, depreciation, and amortisation (EBITDA) for the period was $8.7 million, reflecting an increase of 58 per cent compared to the previous year.

Another remarkable achievement was the company’s ‘delivered margin’, which surpassed the 20 per cent mark. The company's fervent marketing and brand investment was also evident in the result. A high single-digit percentage of net revenue spent on marketing is consistent with the 8.7 per cent of the previous year.

Moreover, Cettire enjoyed a boom in its customer base, witnessing a 69 per cent surge in active customers YoY. Notably, repeat customers constituted a significant 59 per cent of the total revenue. The average order value (AOV) saw a modest hike, increasing by two per cent, settling at $731. By the close of 1Q24, Cettire had amassed a net cash balance of $59 million, a significant jump from $30 million in 1Q23 and $46.3 million at the end of FY23.

In their commentary, Cettire called out the inroads being made in both established and emerging markets. A particular emphasis was laid on the strong customer growth and the uptick in AOV, especially as the quarter came to a close.

The provided figures, while impressive, do suggest a slowdown in growth during August and September 2023 compared to the whopping 120 per cent in July 2023. A rough estimate by analysts pegs growth for the August-September period to be around 75-80 per cent.

An interesting observation is that the ‘returns rate’, which explains the difference between gross and net revenue, stands at approximately 24 per cent, slightly higher than FY23. Meanwhile, the EBITDA margin of 6.8 per cent in 1Q24 fell slightly short of the 1Q23 figure. However, Cettire did highlight that profit trends saw improvement as September rolled on.

Of course, if the company can maintain high double-digit rates of growth, in excess of analyst estimates, its share price will continue to rise. But growth rates have declined since the IPO and the business operates in a universe not entirely supported by the brands behind its products. This may make some investors uncomfortable.

It is believed a meaningful proportion of the companies’ wide range of products are sourced from just a handful of third-party wholesale suppliers. While the company might want to pursue a supply relationship with the manufacturers, those manufacturers aren’t enamoured with the disruptive force of new platforms dropshipping their products at steep discounts[1]. Controlling merchandising and pricing are critical elements to the luxury brands’ own strategies.

In August 2021, The New York Times wrote:

“Imagine you are hunting online for a pair of square-toed slides from Bottega Veneta, one of the most-hyped luxury brands of the moment. A new season pair can cost more than $550 from the brand’s website, an old-guard department store like Neiman Marcus or a newer e-commerce player like Net-a-Porter.

“But what if you chose to buy from Cettire, a website offering discounts of up to 30 per cent on the latest fashion styles? You would be a player in the multibillion-dollar luxury “gray” market, a fast-growing sales sector that has historically operated out of sight of most Western consumers. However, with the arrival in recent years of companies like Baltini in Italy, Italist in the United States and Cettire, which listed on the Australian Stock Exchange at the end of 2020, gray sales have been ending up in millions of digital shopping baskets.”

Gray market sales of luxury goods, and the discounts at which they are offered, are the product of differential pricing across geographies thanks to taxation and pricing strategies in each region. Arbitraging these differences – known as parallel importuning – fuels the gray market in which many of these online e-commerce platforms operate.

Another element of this story that may make longer-term investors slightly uncomfortable is the changing alignment of the founder with smaller shareholders. While Cettire founder Dean Mintz owns 37.2 per cent of the company's shares, as at August 11, 2023, it is a significantly lower stake than held previously.

According to the Australian Financial Review, “Cettire founder Dean Mintz sold an 8.7 per cent stake in the luxury goods seller pocketing a staggering $100 million” in early August. That sale reportedly followed a sale in March last year, where the founder “offloaded 35 million shares – representing a 9.18 per cent stake – at $1.35 a share and pocketing more than $47.2 million.”

“He also sold a chunk in November at $1.46 each, snaring $60 million. All up he has banked more than $200 million in three sell-downs.”2

Selldowns undeniably beef up the financial status of founders who may be perceived to be running for the exists, but selldowns may also enhance liquidity for shares in the market and improve the ‘free float’, which in turns helps with index inclusion, ultimately attracting a broader range of shareholders.

Fast growth is very exciting, and investors are right to sit up and take notice. Globally however the market for luxury goods sales has entered a period of consolidation, for want of a better euphemism. That could mean e-commerce platforms offering luxury goods at a discount could take market share or it could mean they see a steeper slowdown too.

Meanwhile, investors eyeing Cettire’s rapid growth rates may pause to reflect on the implications of a founder selling shares. Before concluding such activity is a sign of worse times ahead, there are many examples of founders selling way too early. Evaluating all of these factors in a balanced way, as well as arriving at some estimate of value and expectations for growth, as well as whether the company can beat them, are the only ways to decide whether shares in Cettire deserve a place in a portfolio and what the weighting should be.