THG, a prominent online retailer of beauty and nutrition products, faced a decline in its share prices after issuing a trading statement that warned of lower profits. Despite achieving record sales and having a strong financial position, the company revised its profit expectations for FY22. It now anticipates adjusted core earnings to range between £70 million and £80 million, significantly lower than the initial forecast of £100 million to £130 million given in October.

One of the factors contributing to the profit shortfall was the disruption in the UK courier network during December, resulting in decreased demand for online beauty gifting. THG operates as a retailer and an e-commerce provider for various brands.

Although THG reported a 3.3% growth in group revenue for FY22 (excluding Russia, the growth was at 4.1%) and an impressive 39.6% increase over two years, it fell short of its target for one-year growth, which was set at 10%-15%. The THG Beauty division experienced a revenue increase of 6.1% and 57.7% over one and two years, respectively, reaching £1.18 billion. The tech-focused Ingenuity division also witnessed growth, with revenue rising by 7.1% and 51.6% to £208.1 million. Overall, core divisional revenue, inclusive of the Nutrition unit, amounted to £2.06 billion, signifying a 4.8% increase over one year and a substantial 42.4% increase over two years.

However, some non-core operations experienced declines. THG OnDemand witnessed a decrease of 16.9% in revenue, while the ‘other’ revenue stream fell by 0.1%. These segments are currently under review and are not included in the core revenue figure.

To support long-term customer retention and attract new customers, THG made significant investments in its pricing strategy throughout 2022. The company also underwent a divisional reorganization, leading to cost savings and increased efficiencies amounting to approximately £100 million. Another £30 million in savings is expected to be achieved in FY23. THG Ingenuity, which was both a source of hope and disappointment, is now gaining traction after refocusing on contracts that offer higher value and margins. The division anticipates adding over £1 billion in incremental Gross Merchandise Value (GMV) to its platform in 2023.

As part of its simplification efforts, THG is reviewing certain aspects of its business, including loss-making categories and territories within the THG OnDemand division. The company aims to streamline its operations and capitalize on opportunities in emerging markets.

The lowered expectation for EBITDA (earnings before interest, taxes, depreciation, and amortization) can be attributed to a combination of lower sales, loss-making categories under review, and the timing of upcoming Ingenuity contracts. However, THG remains confident about margin recovery in FY23 and beyond. This confidence is supported by the full-year impact of £100 million in cost savings, the planned launch of US warehouse automation in Q1 2023, and significantly lower costs of purchasing raw materials.

CEO Matthew Moulding expressed optimism about THG’s future, highlighting the completion of the divisional reorganization and annual savings of £100 million as key drivers for substantial margin expansion. The company is highly confident in achieving adjusted EBITDA margins of over 9% in the medium term.

Useful links:
1. [THG Official Website](https://www.thg.com/)
2. [THG Stock Information](https://www.marketwatch.com/investing/stock/thg?mod=mw_quote_tab)