Mytheresa: Our Update For This Promising Company

Summary

• MYTE continues to grow its customer base and revenue, and the market potential remains enormous.
• Due to the growing customer base and decreasing CAC, the company can reduce selling & marketing expenses as a percentage of revenue in the long run.
• The Curated Platform Model could be an important driver for business revaluation as MYTE becomes more like a marketplace than a retailer.
• CPM implementation can significantly optimize inventory management and improve capital efficiency.
• According to our valuation, the upside potential to the fair price is over 30%. We maintain a bullish position in stocks.

Adrian Vidal/iStock via Getty Images

Investment Thesis

In the previous article on Mytheresa (NASDAQ:NYSE:MYTE), we formed a bullish position. Our thesis was based on market potential, positive financial performance, and low business valuation:

I like growing companies with a competitive moat. Especially, I like it when the market doesn't notice it. In my opinion, Mytheresa is one of the few e-commerce companies whose public offering has not been noticed by the market. I expect the company to continue to grow its revenue and also significantly improve its financial performance in the near future. According to the results of the second quarter, MYTE significantly accelerated its growth, but the market did not revalue it. The company is still trading at a discount to its peers. I buy call options ahead of the next company report. I am ready to increase my stake If a sale starts in the market.

In Q4, the company beat Wall Street's revenue expectations, but net income was not as good. Nevertheless, we are satisfied with the results of the company. MYTE continues to grow its customer base and net sales, and the market potential remains enormous. At the same time, the dynamics of profitability remain positive. By increasing the number of customers and decreasing CAC, the company can reduce Selling & Marketing expenses as a percentage of revenue in the long run. And the introduction of the Curated Platform Model can significantly optimize inventory management and improve capital efficiency. According to our estimate, the growth potential is over 30%. We are bullish on the company.

Highlights From The Latest Report

In Q4 and FY2021, revenue increased by 36.1% and 36.2%, respectively. Revenue growth exceeded analysts' expectations and management's long-term forecast.

(Source: Company's Presentation)

The company recently opened an office in New York and hired a team including Heather Kaminetsky as the President for North America. MYTE also started hosting events in the USA. As a result, net sales in the US in Q4 increased by 133.3% YoY. Let us remind you that the USA is the largest luxury goods market globally, which is much larger than in Europe - the key market for the company. With untapped markets and a growing industry trend, the growth potential is enormous.

(Source: Company's Presentation)

We considered MYTE's ability to create a unique supply through collaborations with major fashion houses as a critical business advantage. Mytheresa continues to develop new collaborations with luxury brands and blow up the competitive moat.

(Source: Company's Presentation)

Demand looks even better than supply. The company has significantly expanded its LTM active customer base by 38% YoY. At the same time, all cohorts of new customers acquired in Q2 of FY2021 show better repurchase rates compared to the Q2 cohorts of FY2020 and their behavior in Q4 of FY2020. It is crucial that the top customer base grows due to a positive customer experience. In the earnings call, CEO Michael Kliger noted:

But most importantly, we grew our top customer base by 64% in the fourth quarter over the corresponding period in fiscal year 2020 and still the average spending of our top customers grew by 10% year-over-year in Q4 of fiscal year 2021. To further enhance our value proposition for our top customers, we launched an exciting partnership with Vestiaire Collective in Q4 of fiscal year 2021, offering a unique resale service for bags and soon also for shoes and ready-to-wear.

Operating indicators confirm the high quality of customer service. Net promoter score increased by 2.2%, and customer acquisition cost decreased by 9%.

(Source: Company's Presentation)

The low price elasticity of demand is the advantage of luxury companies. As a result, gross margins remain robust despite high growth rates. The gross profit margin of 47.7% improved by 140 basis points compared to the prior-year period, driven by higher level of full-price sell-through.

(Source: Company's Presentation)

As a result of Q4, Adjusted EBITDA Margin decreased by 570 basis points YoY, which is why the company missed EPS consensus. The reason for this is an urgent cost reduction due to the pandemic in 2020. It is essential that as a result of FY2021, Adjusted EBITDA Margin increased by 110 bps.

(Source: Company's Presentation)

As such, MYTE continues to grow its customer base and revenue, and the market potential remains enormous. At the same time, the dynamics of profitability are positive. In our opinion, the EBITDA margin forecast is relatively conservative, since due to an increase in the number of clients and a decrease in CAC, the company can reduce Selling & Marketing expenses as a percentage of revenue in the long term.

The company announced the creation of a Curated Platform Model, which could be converting some of the net sales growth into GMV. This model could be an essential driver for business revaluation as MYTE becomes more like a marketplace than a retailer. CPM implementation can significantly optimize inventory management and improve capital efficiency.

(Source: Company's Presentation)

Valuation

We made several assumptions within our DCF model based on the long-term management expectations presented in the last presentation. This data looks reasonable, especially considering that the current sales dynamics are significantly outperforming them.

(Source: Company's Presentation)

We expect the growth rate to slow down due to the exhaustion of the low base effect. FCF is forecast based on an expected EBITDA margin of 9%. Our assumptions are presented below:

(Source: Created by the author)

With a Stable growth Cost of Equity equal to 7%, the Weighted Average Cost of Capital [WACC] is 6.9%.

(Source: Created by the author)

We have determined that the company's fair market value is $3030.5 million, or $35.12 per share. Thus, the upside potential is about 32% to the fair price. Considering the dynamics of the luxury market, our assessment of the terminal growth rate may be too conservative.

Conclusion

The market reacted neutrally to MYTE's latest report. In our opinion, the report was good. The company continues to expand while maintaining profitability. MYTE is a growth company that is yet to gain significant investor attention. Thanks to this, we have the opportunity to buy shares at a reasonable price. According to our valuation, the upside potential to the fair price is over 30%. We maintain our bullish position.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MYTE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[MY Capital]

@Kolomeets Investments whats your opinion on MYTE now, the last two days it’s down %18 i have some money in it, what’s your opinion on it?

[Vladislav Kolomeets]

@my Capital The growth has slowed down, the margin is unstable, but cash from operations is okay. I would say MYTE is hold at the current price.

[MY Capital]

@Kolomeets Investments Thanks for the reply, what caught my attention is that it was down 25 - 30 % in a week, I’m holding on to it, as i think it’s a solid company, if i may ask at what price do you consider it a buy?

[Vladislav Kolomeets]

@MY Capital about 7-10% below

[Gumption13]

The market has this one priced so wrong. Supply chain issues are transitory.

[Christian Louis Boutin]

Back up the truck. MYTE is a great way to get some profits from luxury sales of private company goods from Christian Louboutin, Armani, Cucinelli, and others. And also from those publically traded companies that are harder to purchase stock in such as Moncler.

[MY Capital]

@Christian Louis Boutin if i may ask you, do you still believe in this company, and if so why has the stock been dropping so much?

[Gumption13]

@Y Ungar The market doesn't understand this ultra-high net worth customer that MYTE focuses on. I've witnessed these buyers first hand. During the darkest days of the pandemic when people were not shopping and malls were closing, my wife was working at LV and then Hermes, and those wealthy folks were shopping like they were possessed. The ultra-high net worth social-economic group spending habits are much different from everyone else's—when they're sad, or feeling blue they shop... Hence why this company has had 48% gross margins for the past 5 years. The market has this one wrong in a major way. Time will prove it.

[a.shepel82]

@Y Ungar This is about the action of the whole e-commerce share market. Not particular about MYTE, it is market sentiment. Look at FTCH, ETSY, SE, Ozon ... ETSY was $300 at 28 Nov`21, now it is $126. I think that at least for luxulary e-commerce this is temporary.