Redbubble: 2Q22 update showing margin pressure

About the author:

Steven Sassine
Author name:
By Steven Sassine
Job title:
Associate Analyst
Date posted:
19 January 2022, 9:00 AM
Sectors Covered:
Diversified Financials

  • Redbubble (ASX:RBL) released its 2Q22 trading update, which showed larger than anticipated cost pressures impacting key margins and revised FY22 guidance well below MorgansE/consensus estimates.
  • 1H22 marketplace (MP) revenue is expected to be A$288m (~2% under MorgansE and Visible Alpha consensus), while GPAPA of A$63m missed (by ~16%) our estimate. 1H22 EBITDA of A$8m also came in materially under our estimate/consensus (~A$23m/A$24m), with full year guidance of FY22 EBITDA margin as a % of MP revenue to now be “negative low single digits”.
  • The elevated PAC spend (~A$45m/~15.5% of MP revenue) in the half, reduced the GPAPA margin to ~22% (vs MorgansE at ~25%) and was attributed to intensified competitive pressures and recent IDFA changes.
  • We lower our FY22F/FY23F/FY24F EBITDA by ~40%-130% factoring in today’s update/amended guidance as well as additional margin conservatism over our forecast period. Our DCF-derived price target is lowered to (login to view).

2Q22 update disappoints, highlighted by margin pressure

Redbubble (ASX:RBL) released its 2Q22 trading update, the key takeaway, in our view, being the larger than anticipated cost pressures impacting near term margins. FY22 guidance was amended and well under our estimates/market consensus.

Analysis

1H22 marketplace (MP) revenue is expected to be A$288m (A$283m ex-masks, ~2% under our estimate and Visible Alpha consensus), implying ~A$180m revenue in the 2Q (down ~11% on pcp). FY22 MP revenue is now expected to be slightly lower than FY21 underlying MP revenue (i.e. under A$497m), versus previous guidance of being slightly above. RBL reiterated its commitment to its medium term target of A$1.25bn MP revenue per year.

1H22 Gross Profit of A$108m was -25% on pcp, with GM in the 2Q (36.1%) being well under managements’ medium term target of 40%. This was predominantly due to higher shipping costs that were absorbed by RBL (strategy to improve conversion and repeat customer rates), along with a slight margin headwind from the product mix in the half (e.g. lower mask, higher apparel).

PAC spend broadly doubled quarter-on-quarter to be A$45m in 1H22 (~16% of MP revenue in 2Q22 vs ~14% in 1Q22), with an increase in competition intensity in 2Q22 leading to lower organic (i.e. unpaid) demand and elevated CAC’s (as companies adapted to recent IDFA changes by ramping marketing spend). This resulted in a 1H22 GPAPA of A$63m (-37% on pcp) with a GPAPA margin of 21.9% being well under the ~25%-28% historical range.

1H22 EBITDA of A$8m was materially under our estimate/consensus (~A$23m/A$24m), with management expecting the elevated opex to continue in the 2H (additional headcount). Management also provided guidance for the FY22 EBITDA margin as a % of MP revenue to be “negative low single digits”.

With A$143m cash on hand at 1H22 (expected to normalise out to A$100m- A$110m), RBL has plenty of firepower to continue to invest in its technology platform, brand and customer experience.

Forecast and valuation update

We lower our FY22F/FY23F/FY24F EBITDA by ~40%-130% factoring in today’s update/amended guidance and some additional margin conservatism over our forecast period (e.g. FY26 EBITDA margin of 11% being well under RBL’s aspirational target range of 13-18% at scale). Our DCF-derived price target and valuation falls to (login to view) on the above changes.

Investment view

With the recent share price fall leading to ~55% TSR versus our price target, we maintain our Add recommendation. We continue to remain attracted to RBL’s global footprint, vast fulfiller and artist network and structural e-commerce tailwinds, acknowledging the short term margin headwinds that are currently evident.

Risks

ST margin risks remain with increased cost investment; competitive intensity; and marketing cost inflation. General macro risks to discretionary retail also exist.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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