Investment Ideas From the Edge of the Bell Curve
While peer Sezzle finished 4.8% higher on Tuesday following the release of its 4Q22 update, Splitit (ASX:SPT) had no such luck.
The BNPL firm ended the day down 5.9%.
For the year ended 31 December 2022, Splitit posted revenue of US$10.6 million, up slightly from FY21’s US$10.5 million. When you take into account inflation, that revenue ‘growth’ is very modest.
However, Splitit did see a bigger improvement in the bottom line. Net loss shrank 43% to US$22.6 million.
Splitit said it was able to cut operating expenses 31% YoY through a ‘pivot to white-label strategy and general cost reductions’.
Even though revenue was totally flat, merchant sales volume rose 9% YoY to US$431 million, suggesting lower taker rates for FY22. SPT sees its merchant sales volume hitting US$2-4 billion over the next three years.
Revenue as a percentage of underlying merchant sales was 2.5% in FY22, down from 2.7% in FY21.
While Splitit considers itself the only white-label instalment solution that taps consumers existing credit on their credit cards, Westpac just recently launched a competing product that also lets users leverage their existing credit cards to break purchases into even instalments.
In the long run, everything is a toaster, #BNPL edition. $WBC $ZIP $SZL $SPT $OPY $LBY #SQ2 pic.twitter.com/0pt9l9SdYd
— Fat Tail Daily (@FatTailDaily) February 24, 2023
Will FY22 go down as a ‘watershed moment for Sezzle’?
Sezzle thinks so.
Announcing its fourth quarter and FY22 results, the BNPL firm said it has transformed from a company that reported a net loss of US$75.2 million in FY21 to ‘exiting 2022 with net income in the fourth quarter’.
‘Improved unit economics and a more efficient operating structure’ led to adjusted EBITDA of US$7 million. Sezzle said this adjusted EBITDA figured improved by over US$28 million against 4Q21.
Adjustments aside, Sezzle reported that its 4Q22 net income was US$600,000 versus a net loss of US$25.9 million a year ago, a US$26.6 million turnaround.
How was Sezzle able to achieve this turnaround when rivals continue to widen losses like Zip or enter receivership like Openpay?
Sezzle said a ‘significant portion of the YoY improvement was attributable to the reduction in the provision for uncollectible accounts.’
For instance, the provision for uncollectible accounts fell to 1.2% of underlying merchant sales in 4Q22 from 3.5% in 4Q21.
Is this sustainable? Or will Sezzle’s provisions prove too optimistic, especially the souring macroeconomic conditions?
Sezzle’s provisions went from US$52.6 million in FY21 on UMS of US$1.8 billion to US$29.4 million in FY22 on UMS of US$1.7 billion.
Source: Sezzle
#BNPL $SZL heralded a 'watershed' moment for the firm after exiting 2022 with positive net income of US$600k in 4Q22.
Sezzle attributed the YoY net income turnaround to a reduction in the provision for uncollectible accounts.
What happens when the provision proves too rosy? pic.twitter.com/M2B42t57CL
— Fat Tail Daily (@FatTailDaily) February 28, 2023
Pointsbet’s accounts state the betmaker’s net loss grew to $178 million.
But Pointsbet’s management wants investors to focus on the normalised result, which shows net loss reducing 22% to $163 million.
This normalised result excludes the impact of ‘significant non-recurring items and adjustments’ like the $16.8 million in non-cash share based payments.
While investors put more weight on the statutory net loss, management is touting the normalised performance.
Group chief executive Sam Swanell said the 1H23 results ‘show our North American strategy is delivering — revenue growth is up and costs are going down, and the Australian business is continuing to deliver.’
What about the metrics that can’t be normalised? How is the underlying business going?
Pointsbet was able to grow revenue because its turnover rose 40% to $3.2 billion.
However, while turnover rose 40%, the gross win margin fell from 10.9% to 8.3%.
The gross win margin is the dollar amount received from PBH’s clients who placed losing bets minus the dollar amount amount paid to clients with winning bets as a percentage of turnover.
The net win margin also fell, from 6% to 4.9%. The net win margin is the gross win margin including any promotional costs. Pointsbet defines these promotional costs as any costs ‘incurred to acquire and retain clients through bonus bets, money back offers, early payouts, and enhanced pricing initiatives’.
Pointsbet continues to spend big on marketing and employees. Its marketing and employee benefits expenses totalled 116% of its revenue.
Pointsbet basically spent a dollar on marketing and employee benefits alone to make 86 cents in sales. That’s not sustainable.
Up 1,100% between March 2020 and Feb 2021, $PBH is down 92% since.
But management thinks its latest results — a widening net loss of ~$180m — show progress.
'To put it simply, the jaws at Pointsbet are positive. Revenue is growing strongly, and costs are reducing.'#ASX pic.twitter.com/zZkIa1XmJ3
— Fat Tail Daily (@FatTailDaily) February 28, 2023
Pointsbet seems to still be operating under a model popular circa 2020/21 — growth at all costs, profits be damned.
That was a fine operating model then, with PBH stock gaining over 1,000% between March 2020 and early February 2021.
But the operating model seems antiquated — even affronting — now.
Investors want capital discipline now and profitability ASAP.
Pointsbet didn’t listen.
1H23 net loss widened 22% to $178 million while revenue grew 28% to a symmetrical $178 million.
Rising sales and rising losses may have been accepted a few years ago for the sake of market share/dominance/scale/flywheel effects, but markets are more jittery now.
Rising cost of capital also makes these times ones of narrower margins for error.
Earnings season is nearly over.
Coal stocks notched record profits, the big banks made the most of rising interest rates, and Zip Co [ASX:ZIP] continued to incinerate cash.
It was an exciting reporting season that also offered opportunities to consolidate individual results into larger themes.
I think a clear theme emerged in the retail sector.
https://www.moneymorning.com.au/20230228/what-are-asx-retail-stocks-telling-us.html
Large retailer Harvey Norman is down 12% at midday on Tuesday after 1H23 revenue fell while cost of sales rose.
Profit after tax also fell year on year. 1H23 PBT is down ~15% to $522.7 million and down 19% on 1H21.
The only percentages Harvey Norman wanted to highlight were for comparisons between 1H23 and 1H20.
Source: Harvey Norman
Source: ABS
We’ve talked about Philip Lowe’s comments on discounting in an earlier post, and it’s interesting to see them play out with Harvey Norman.
Lowe’s Law states that if demand is strong, businesses don’t discount. If businesses do discount, demand isn’t strong.
Talking about the under-performance of its overseas segments, Harvey Norman mentioned discounting outright:
“Overseas profitability has decreased, primarily in New Zealand, from a contraction in gross margins due to discounting and the normalisation of operating costs following two years of COVID disruptions and closures.”
For its franchising retail segment as a whole, it was more demure but admitted that the steep drop-off in profit in 1H23 was ‘primarily due to higher marketing expenses and costs to assist franchisees invest in their customers in order to promote and enhance the Harvey Norma brands.’
An addendum to Lowe’s Law could state: If demand is strong, businesses don’t lean on marketing.
With the release of January’s retail sales data, I thought I’d share some interesting recent comments from Reserve Bank governor Philip Lowe.
The comments were made during Lowe’s February appearance before the House of Representatives Standing Committee on Economics.
The Hansard transcript is available here, if you want to skim.
Asked about the recent price hikes from businesses, Lowe observed that when demand is strong, businesses don’t discount:
“I don’t recall any business ever saying they’d increased their prices to generate fat in their margins. The main message we have been hearing from business over recent times is that it’s hard to get workers, there’s a lot of turnover in the labour market and they’re having to pay more. Our main challenge is getting workers. Firms have not been complaining about a lack of demand—most firms haven’t. They’ve been complaining about a lack of workers and, for a while, the increasing intermediate important costs, but that seems to have gone away. They’re telling us now that it’s still hard to get workers, but not as hard, and demand is still strong. We see that in all the business surveys. Businesses are saying things are above average.
“On pricing, they don’t say this, but when demand is strong, you don’t discount. If demand for your product is strong, why would you discount? That’s one of the reasons, I think, why inflation has been high recently. Demand is strong and firms don’t discount. Some firms, no doubt, take the opportunity to put up their price when demand is strong. That’s how it works. Higher interest rates will mean that demand won’t be so strong, and firms will once again start discounting and prices will have to be a bit skinnier. We expect that to play out over the course of this year. That’s the process of bringing inflation down. That’s what we hear. But firms don’t talk about pricing; they normally say, ‘Our costs are going up, so we’ve got to put our prices up.’ But we know that when demand is strong, you don’t discount and you put your prices up.”
Department stores had the biggest rise in sales turnover in January, increasing 8.8%.
Clothing, footwear, and personal accessory retailing was next, rising 6.5%.
Other retailing and household goods were the laggards, rising 2.9% and 1.1%, respectively.
Source: ABS
The data is in!
Australian retail sales rose 1.9% in January. This follows an adjusted 4% fall in December 2022. January retail sales rose 7.5% on January 2022.
ABS’s Ben Dorber commented on the data:
“Looking through this volatility shows that turnover is at a similar level to September 2022, and on average, growth has been flat over the past few months.
“November, December and January are the most seasonal months of the year, with retail activity heavily affected by the Christmas period and January holidays. This has been heightened by an increase in the popularity of Black Friday sales and growing cost of living pressures combining to drive a change in usual consumer spending patterns.”
Source: ABS
Very soon, we’ll get some big data on Australia’s retail sales for the month of January from the Australian Bureau of Statistics.
If you remember, in the month of December, retail sales surprisingly fell 3.9%, the first decline after 11 straight months of growth.
Will there be a rebound or will retail sales disappoint again?
The level of retail spending will be a key indicator of household financial health and how well the Reserve Bank’s rising interest rates are wending their way through the economy.
A few Aussie retailers reported yesterday. City Chic, Kogan, BWX all reported lower revenue and rising costs.
And Harvey Norman is currently cratering on lower sales.
Do these results presage soft January retail sales?
We’re about to find out.
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Investment ideas from the edge of the bell curve.
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