The awakening of e-commerce

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Ilczynski’s first year in the role will be remembered for two things: the bullish financial forecast he released in April last year for Redbubble’s performance through 2024; and its courageous decision to stick to those forecasts after a downward earnings revision on Tuesday.

He said the company remains committed to its medium-term aspirations to grow deal volumes to over $1.5 billion, grow artist revenue to $250 million, and generate market revenue of $1.25 million. billion dollars a year.

Ilczynski also stuck to his assertion that Redbubble’s EBITDA margin will increase over the medium term as it achieves revenue growth.

We are returning to a time when retailers will actually have to compete against each other based on their own strengths and weaknesses.

— Daniel Broeren, Watermark Portfolio Manager

But judging by the questions in Redbubble’s analyst call, the market’s focus is on the company’s rising costs and shrinking profit margins rather than its long-term aspirations.

Asked if the company would stick to its revenue target of 20-30% compound annual growth, Ilczynski did not back down from his earlier statements on the outlook.

“It is our medium-term objective, for this activity to grow by 20 to 30%,” he said.

“We sincerely believe that it is possible between the markets in which we operate, the growth that we believe our sector will achieve and the growth that we believe we can generate ourselves.

“It’s not going to be linear. You know that’s not how these things work. What we are really clear on is where we need to invest over the next two years in order to continue and achieve this growth. »

The sharp decline in Redbubble’s market revenue in the first half — down 18% to $288 million from 2021 — was due to the one-time surge in demand for face masks.

The company said full-year 2022 revenue would be slightly lower than the 2021 result, and the 2022 EBITDA margin as a percentage of market revenue would be “negative to low single digits.”

Higher costs

Watermark portfolio manager Daniel Broeren said Redbubble’s share price held steady over the past 12 months due to its strong medium-term outlook, despite evidence of rising costs. marketing and lower profit margins.

“I think now the market realizes that they’re really a bit of a drag as things stand, and there’s a lot of wood that needs to be cut by then for Redbubble to come close. of these targets,” he said. .

Costs rose at Redbubble as stiff competition drove up customer acquisition costs.

When an analyst asked Ilczynski if Redbubble was facing a structural change in digital marketing costs, he said it was a “really critical question” that no one knew the answer to.

He said the “chaos” of digital marketing will continue for some time, but he believes it will normalize. The question is: how do you know what is normal after two years of COVID-19 disruption?

Broeren believes that coming out of the latest wave of COVID-19, online retailers will face more intense competition and be forced to pay more for traffic-driving Google Adwords.

Redbubble highlighted the over 60% increase in market revenue and gross profit over the past two years, but that hasn’t stopped the market’s negative response.

The performance of Good Guys owner JB Hi-Fi stands in stark contrast to Redbubble.

The JB Hi-FI division managed to maintain its profit margin at historically high levels; it was 8.89% in the first half of the year and 9.83% in the previous corresponding half-year. Two years ago, it was 8.3%.

At the Good Guys, the profit margin slipped to 8.41% in the first half, from 8.73% in 2021. But the critical comparative figure dates back to two years ago, when the profit margin was around 4% .

In other words, COVID-19 has seen the company sacrifice very little margin on higher volumes.

JB Hi-Fi showed the power of its franchise and why it was able to react strongly to competition from Amazon. Its total first-half sales of $4.86 billion were down 1.6% from a year ago but up 21.7% over a two-year period.

Online sales were $1.1 billion, up 62.6% from a year ago, representing
22.7% of total sales. This gives him enormous bargaining power with suppliers.

Broeren says that as the stimulus from COVID-19 wears off and Australians return to normal lifestyles, including overseas travel, there will be an adjustment in retail valuations.

“What you’ve had in the last 18 months is all this stimulus money floating around and the shortage of inventory, which has meant retailers have been able to charge higher prices and generate bigger margins,” he said.

“It has allowed many retailers – good and bad operators – to trade well.

“What you are seeing now is stimulus money fading away, and we are returning to a time when retailers will actually have to compete based on their own strengths and weaknesses.

“I think you’re going to see a real divergence in performance among retailers going forward.”

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