Cettire (ASX: CTT) is an ASX small-cap company that runs an eponymous website which sells grey market luxury goods at discounted prices. This means that when a third party retailer or distributor has luxury goods they need to clear, they can sell it via Cettire. The third party retailer (not the brand itself) thus clears the stock, and Cettire takes a cut.
Cettire attracts new customers largely by advertising, though over 50% of its transactions are from repeat customers. Cettire is remarkable for growing its revenue aggressively with dumpster fire unit economics, in what must be one of the ASX’s most startling examples of borderline innumeracy.
For example, in FY 2022, Cettire grew its revenue 127%, $209.9 million, but its gross profit was much smaller, at only $37.4 million. Remarkably, the marketing spend was $43.4 million, considerably more than the gross profit. That means that the company spent more on marketing to gain clients, than it generated from gross profit. The theory, here, is that the same customers will come back in the future, and shareholders better hope they do, given they are paying through the eyeballs to attract those customers.
Cettire Boasts Adjusted EBITA, Founder Sells Shares
Yesterday, alongside the AGM, Cettire announced “YTD FY23 Adjusted EBITDA(1) (unaudited) for the first 4 months of at least $8.5 million.” The footnote states that “Cettire uses Adjusted EBITDA as a non-IFRS measure of business performance which excludes expenses associated with the IPO, share-based payments, unrealised FX movements and unrealised loss/ (gain) on derivative contracts.”
Hilariously, this announcement was followed by a large sale of shares by the CEO, announced this morning. Specifically Cettire founder and CEO Dean Mintz has sold 41 million shares at $1.46 (and agreed to escrow the rest of his holding, being over 45% of the company, until at least February next year). Today’s sale raises around $60 million for Cettire founder Dean Mintz, but comes on top of an earlier sale in March this year.
Back in March, Cettire founder Dean Mintz sold 35 million shares at $1.35 per share, raising about $47.2 million.
Adjusted EBITDA Is Not Profit
Today’s sale by Cettire founder Dean Mintz caught the attention of many because the update only included an update on the vague unaudited Adjusted EBITDA metric, rather than actual profit. Many have been speculating that although the company has positive adjusted EBITDA, it may well be making a statutory loss.
Furthermore, a company like Cettire can temporarily boost profit by cutting back on marketing, but that will ultimately see slower growth. The company had $40 million in cash at the end of October and burned through a little bit more than $20 million in cash in FY 2022. However, at the end of FY 2022 it had only around $22 million cash, so it is surprising that the cash balance has increased to $40 million. It will be interesting to see if the increased cash balance is accompanied by an increase in payables, which could arise if Cettire changed its payment terms with vendors using its platform.
Sometimes, companies give adjusted metrics (rather than statutory metrics), because they feel that the adjusted number is a better guide to the underlying earnings power of the business. According to this announcement yesterday Cettire had adjusted EBITDA of “at least $3 million” in October, implying an adjusted EBITDA run rate of around $36 million per year.
Cettire has a market cap of around $560 million at $1.46, and cash of $40 million according to the company, implying an enterprise value of around $520 million at that price. Even using the non-statutory unaudited Adjuted EBITDA for October, and generously annualising that, the fund managers buying shares from the founder are paying over 14 times a generous forecast of an unaudited, non-statutory figure.
I can’t help wondering what multiple of FY 2023 profit these buyers have paid to a more knowledgeable seller. I suspect the multiple will be a high one, if Cettire even makes a profit, in FY 2023. Won’t it be ironic if Cettire makes a statutory loss in FY 2023, despite titling their announcement yesterday “continued profitable growth”?
Personally I’d rather spend my time looking at growing companies that make actual real statutory profits.
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Disclosure: the author of this article does not own shares Cettire. This article is not intended to form the basis of an investment decision and is not an official recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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