BUY HOLD SELL – Cettire (ASX: CTT)
In the instant gratification world, the younger generation lives in today, Instagram, TikTok, cryptocurrencies and NFT’s are the mediums through which a ‘career’ for a very loose use of the word can be formed. Most of them fuel a culture that goes against every financial theory you learn at university. A dollar today is worth less than a dollar tomorrow in this new paradigm, because today, you can impress your followers and look like a millionaire before the next person.
This is not, as I found, an affliction exclusive to Gen-Y’s. The HENRY’s, as coined in a 2003 article by fortune magazine (Higher Earners, Not Rich Yet) have been around for some time, just rebranded as impatient millennials today. Chris will be able to enlighten me about what HENRY’s bought back in his day, but I digress. The point is that young people have money, and ‘some’ want to spend it on expensive things like $915 Prada slides. If you need convincing here are some numbers.
- In 2019 Millennials, represented 32% of spending in the personal luxury market, but by 2025 they are expected to make up 50% of the total market according to Forbes
- Online luxury sales reached €49bn at the end of 2020 (up from €33bn in 2019) according to estimates by Bain & Company.
- Online purchases of luxury goods nearly doubled to reach 23% of total sales in 2020.
- Moët Hennessy Louis Vuitton is up more than 100% from the pandemic low and has a market cap of more than $300bn.
Cettire, an online luxury fashion retailer has been in the right place at the right time to capture all that excitement. The stock is up more than 600% since its December 2020 listing, beating its prospectus gross revenue forecast by 40% to reveal a 333% growth on FY20. As Henry pointed out recently (our Henry not the acronym to be clear), unless you’re NXL, most new floats have a trick up their sleeve to impress the market and beat their prospectus. So, it should be taken with a grain of salt.
Fundamentals aren’t what the market is paying attention to, it’s growth in active customers, orders and website visits are all in the hundreds of percent and are garnering the most interest. They are the first numbers you are invited to see in the annual report on page 2. That said, high numbers create an expectation to continue to perform at the same level which leaves a few questions about sustainability. CTT is stilling on a PE of -694x with an ROE of -5.3%, typical numbers for a newly listed high growth stock. You’re paying for the growth and the potential, not the business which apparently doesn’t even have an office.
~60% of its customers are in the US and through some clever tax loopholes, CTT can sell products without a 20% value add tax and for orders under US$800, no import duties. The business surprisingly has no direct relationship with the high-profile brands it sells, purchasing stock through third party providers. Some of which operate in a ‘grey market'. The company is essentially a drop-shipping business where the seller accepts customer orders but does not keep goods sold in stock. No inventory no worries, right?
CTT is understood to be in talks to establish partnership opportunities, but that may not be in its best interest. One criticism about partnerships is the ability for brand owners to have a greater influence on price if they are closer to the transaction. The other big concern is directed at brand owners cracking down and limiting CTT’s ability to resell products at a discount. The chatter and unease around the relationship or lack of with brand owners doesn’t inspire confidence. CTT is understood to have blocked IP addresses from parts of Europe preventing brand owners from seeing the products and prices it offers. CTT has rebuffed speculation that their intention was to prevent brand owners from seeing products and prices.
In the second week of September Bell Potter lifted its price target 63% to 310c. Not much broker commentary running around.
A very attractive near 700% return since IPO. CTT printing a very clean all-time high of 400c. RSI is hovering just below overbought territory with the MACD forest still signalling bullish momentum, for the moment. All the moving averages are tracking in a typical bullish configuration, although not shown in the chart to avoid overcomplicating.
The gap in trading on June 15 came after an article in the AFR highlighting the ‘cloud of mystery’ the business operates in which was critical of CTT’s longer-term prospects. The response from the company was enough for the market to regain a bit of confidence although, that was slowly eroded with little news until its full-year results. The results announcement wasn’t well-received with the day characterised by a lack of conviction. Direction returned a few days later with a 20% rise with the price action improving ever since.
Regal Funds management sold down its position in March with supply chain concerns understood to be the catalyst for the sale. The chairman’s letter attempted to rebuff concerns saying he was confident in the sustainability of its supply chain given the legally binding contracts with CCT’s partners. Dean Mintz, the 36-year-old founder controls 65% of the company. Tony Gandel, son of billionaire property developer, John Gandel and ex-investment banker David Tozer other notable names on the shareholder registry. Gandel recently shared a glowing review with the AFR about the company’s apparent competitive advantages. Let's be real, you wouldn’t be talking it down now would you with a ~$1.8m personal holding.
Short interest peaking around the time of the AFR’s ‘cloud of mystery’ article, the second spike short-lived coinciding with results. Seems like no one knew if the numbers were good or bad at the time. Having said that with 75% tied up in a few safe hands, that leaves little stock available to short.
If this was a business that was making money out of selling its own goods this conclusion would have a different flavour. The beat on the prospectus, upgrade through the year, strong technical picture, eye-watering growth numbers and momentum into FY22 present CTT in an exciting and engaging spotlight. That said, in the longer term, it is hard to reconcile those positives with the big underlying question about how CTT will develop relationships with the well-known fashion houses. It is quite likely they will come knocking on the door and want to have a say about the price CTT can discount/sell their products at. What happens to the share price if it gets another cease-and-desist letter? The blocking of IP addresses even if done with good intentions does make it appear a little slippery. Fundamentals aren’t worth paying attention to as it reinvests earnings back into growth initiatives like customer acquisition and building organisational capability. Supply chain headwinds around the world are also likely to pressure operations at some point in the near term. The investment case leaves you wanting in the long term, but the wind is in CTT’s favour in the near term. HOLD.