The Redbubble Ltd’s [ASX:RBL] share price fell 20% after its latest results update flagged falling margins in pursuit of growth.
Shares in the e-commerce player closed 23% lower on Thursday.
Yesterday’s steep fall contributed to RBL shares being down 21% year-to-date.
Nonetheless, Redbubble’s growth has seen its share price rise 480% over the last 12 months.
Source: Tradingview.com
Redbubble’s YTD performance
Redbubble — which lets independent artists sell their designs on items like T-shirts, stickers, and homewares — yesterday provided a trading update relating to the nine months ended 31 March 2021.
RBL’s YTD financial metrics were as follows:
- Marketplace Revenue of $456 million, up 85% (97% on a constant currency basis)
- Gross profit of $184 million, up 100% (114% on a constant currency basis)
- EBITDA of $51 million, compared to a loss of $2 million in FY20
- EBIT of $41 million, compared to a loss of $12 million in FY20
- Operating cash inflow of $54 million, compared to $6 million in FY20
- Closing cash balance at 31 March 2021 of $102 million
Despite these solid figures, not all metrics were positive.
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For instance, while gross profit was up 55% in 3Q FY21 compared to 3Q FY20, paid acquisition (marketing) costs rose 71% in the corresponding period.
In yesterday’s shareholder conference, Redbubble CFO Emma Clark explained that RBL ‘saw organic demand soften in February and took up opportunities to drive additional top line growth via paid acquisition channels.’
And while EBIT grew a significant 91% in 3Q FY21, it was still in the red by $0.9 million.
Nonetheless, YTD FY21 EBIT grew by $53.1 million, lifting RBL out of the red zone to post a positive EBIT as of 31 March 2021 of $40.9 million.
Clark also pointed out Redbubble generates approximately 94% of its revenues in US dollars, the euro and pound sterling.
But since it’s domiciled in Australia, RBL translates the sales back to Australian dollars for reporting purposes.
Clark revealed that these FC differences were a ‘headwind for the year to date of 12%.’
The difference was even more pronounced in the latest quarter, with a headwind of 22%.
Redbubble CEO pitch to shareholders
In a letter to shareholders, recently appointed RBL CEO Michael Ilczynski laid out the company’s medium-term aspirations and overall direction.
Ilczynski reiterated Redbubble’s mission to ‘create the world’s largest marketplace for independent artists.’
With that mission in mind, the CEO told shareholders that Redbubble’s medium-term aspiration is to:
- Grow gross transaction value to more than $1.5 billion
- Grow artist revenue to $250 million
- Produce marketplace revenue of $1.25 billion per annum
A likely contributor to RBL’s sell-off was Ilczynski’s admission that achieving these aspirations will be a ‘challenge’ that may lead to ‘some short-term reduction in EBITDA margins.’
Ilczynski expects that, short term, RBL’s EBITDA as a percentage of marketplace revenue will be ‘in the mid single digit range over an annual period.’
The CEO concluded that ‘above-system growth can only be achieved in the long-term through proactive actions. As such we will focus on a process of targeted experimentation, with disciplined investment only when we are confident in the returns to be generated.’
Ilczynski joined Redbubble from Seek after RBL Founder Martin Hosking led the company as interim CEO following the ousting of former leader Barry Newstead.
What does the update mean for Redbubble Share Price?
Redbubble is currently trading with a PE ratio of 33. For comparison, fellow e-commerce player Kogan.com Ltd [ASX:KGN] has a PE of 29.
To justify that multiple, investors may have expected stronger growth figures and less sobering talk of disciplined investment and shrinking margins.
OpenMarkets Group Chief Executive Ivan Tchourilov commented that Redbubble’s update ‘clearly disappointed investors.’
The Australian Financial Review even reported that RBL’s update ‘missed analysts’ revenue and profit margin expectations by a distance.’
Tchourilov thought RBL had a ‘fantastic run over the past 18 months, but it goes to show what can happen when valuations get ahead of themselves and earnings disappoint.’
On the other hand, Redbubble CFO Emma Clark noted in the conference call that RBL ‘operates through a retail cycle and is therefore seasonal in nature.’
She wished to remind investors that her company’s first half of the financial year is ‘always larger than the second half.’
Clark urged that ‘our financial metrics should be viewed over a full financial year period.’
In turn, RBC Capital Markets Analyst Tim Piper told the Australian Financial Review that the profit margin reduction was substantially lower than consensus earnings expectations over the next couple of years.
Piper noted that ‘what will be important to the direction of the share price now will be whether the market believes the longer-term aspirational targets can be met.’
In the end, Piper thought the implied margins included in the aspirational targets ‘do look a little on the conservative side of what we thought the business could achieve at greater scale, and this looks largely driven by the marketing requirements.’
Longer-term aspirations aside, there is no doubt Redbubble has shown some incredible growth recently.
With a market cap of $1.16 billion, RBL is no longer one of the ASX’s small-cap stars. But if you’re on the hunt for the next RBL, then I recommend reading our free report on promising ASX small-caps.
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Regards,
Lachlann Tierney,
For Money Morning
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