Description

#s in euros

Overview

Disclaimer that this is a low liquidity, low float PA-type idea. As such, it’s unsuitable for many and subject to all the related risks. Mytheresa (MYTE) is a leading online luxury retailer. The company faces significant competition in this space but has distinguished itself with (a) its historical profitability (rare) (b) reputation as a quality operator in the eyes of brands (utmost importance) and consumers and (c) its focus on the higher-end “wardrobe building” customers as opposed to aspirational luxury customers, i.e., specializing in the higher end of the wealthy customer tier who use personal shoppers and are less discount-seeking and generally less economically sensitive.

Thesis and thesis timing opportunity

1. Outstanding value on peer comparable basis:

• peer low EV / revenue, EV / gross profit, EV / ebitda, despite better than peer growth and profitability

2. Margin of safety and upside using a strict balance sheet and asset-style valuation approach.

• Current assets less TOTAL liabilities = 186 mm. Compares to market cap of 215.
• balance sheet inventory of 379 mm plus a 30% markup equals (the true markup is much higher) = 491 of inventory-driven cash potential. Subtracting TOTAL liabilities of 243 = 248 of equity value. This is more than 15% above the current market cap even in this liquidation-esque type analysis. At markups more consistent with the company’s gross margin, inventory values alone are worth more than 150% of the current market cap.

3. Current period likely represents a trough level for industry given currently unfavorable supply-demand balance not seen since financial crisis. This doesn’t guarantee a swift recovery but MYTE has discussed pared back spring inventory purchase levels are likely to help rebalance industry supply demand. This is generally corroborated by other retailers’ comments about overall over-inventory levels.

4. Despite significant industry headwinds, MYTE has uniquely maintained growth, profitability, and is gaining share. MYTE also seems to do ‘at least as good’ but a likely better job than all its peers in attaining industry-leading brands and partnerships (e.g., exclusive capsule collections). The partners value the higher-high-end customer base and more full-price sell-through at MYTE. Despite MYTE’s financial results slowing in recent quarters, the positive variation vs. peers is even more noticeable.

5. This one is what makes this idea potentially timely: Potential upside from disruption at Farfetch, key public competitor. Farfetch recently lost more than half its value after news reports regarding a potential take-private by its founder, the delay of its earnings and withdrawal of its guidance, and the indications by Richemont that Richemont does not intend to fund Farfetch and seemingly could walk away from their previous agreement to sell Yoox Net a Porter to Farfetch. This is an extraordinarily uncertain, and therefore risky situation. However, I view most of the outcomes as a likely weakening of Farfetch and / or Net a Porter and luxury brands’ appetite to work with them. Should Farfetch falter further, MYTE could quite easily gain significant share given FTCH’s relatively larger size. Should Farfetch be successful in its take-private, this could raise the chances that MYTE is also acquired which would almost certainly occur at a premium valuation given MYTE is in a reasonably strong financial position and well-respected in the industry. MYTE would also become a more unique public asset as the remaining pure play luxury ecommerce name. Under a successful go-private scenario, it’s likely that Farfetch would be more disciplined with its sell-through rather than dumping inventory. On the other hand, a weakened public version of Farfetch or distressed scenario could potentially cause negative near-term industry disruption but would further cement MYTE’s positioning in the long term.

Valuation

I alluded to valuation upside above but would further note MYTE generated 69 mm and 41 mm of ebitda in its two most recent fiscal years (ending June 30) vs. its market cap of 215. In the upcoming fiscal year, MYTE’s revenues will be 21% and 8% higher than these years; however, ebitda is expected to be much lower given the depressed profit margins given the current point in the industry cycle (3% expected margin vs 10% and 5% in the two prior years). Returning to a more normalized 6% margin in the FY ending June 2025, MYTE would regain a record 70+ mm of ebitda, for a market cap / ebitda ratio of just ~3x. I envision a return to a $6+ trading price – 100% upside, but still a modest multiple – upon signals of industry supply rationalization which I would estimate occurs by Spring 2024.

Risks

- Inventory is high and turns slowly. The company drew its revolver to fund the normal 1Q inventory seasonality but provided reassurances on the call that October inventory YoY changes were down notably from the quarter-end (sep) figures and that the current revolver is sufficient for future needs. Management is well-regarded by peers in the industry and covering analysts.

- Supply-demand is not restored in CY’24. As discussed, the mitigant here is that companies are actively paring back inventory buys which should naturally help full-price sell through rates and profitability. Regardless, MYTE is showing they can operate profitably even in challenging environments.

- Low liquidity, low float, which has created this opportunity and can serve as an inhibitor  

Catalyst

market participants realize current industry turmoil favors company's long term positioning