MYT Netherlands: Shifting My Position To Hold

Investment thesis

My original thesis was that MYT Netherlands (NYSE:MYTE) has a leg up on the competition thanks to the compelling value it provides to consumers and brands through its multi-brand online retail model. Current results, however, have revealed the significance of this macro environment, and that the macro overhangs have passed. Because of this, I no longer recommend buying the stock and instead maintain a hold rating because MYTE stock is likely to remain range bound until the company provides strong evidence that it can hit 2H numbers. I think investors are looking to reduce portfolio risk by purchasing safer stocks at the moment, and MYTE doesn't seem to fit the bill as it calls for a sizable reacceleration on revenue and earnings to reach the low end of FY23. However, my long-term thesis for MYTE remains the same: the company can use its data-driven platform to better understand its customers and provide more tailored recommendations and customer service.

Earnings results

When compared to the consensus estimate of 12% GMV growth for 2Q23, MYTE's actual growth of 8% suggests a 16-point sequential slowdown in 2-year stack growth. Annual revenue growth came in at 1%, well below the 7% growth forecast consensus. Similarly, the 9.3% adj. EBITDA margin fell short of consensus estimates of a 12.4% margin. The switch to the CPM model helped drive a 1.4pt increase in gross margin year over year, but increased promotional activity drove a 50bps decrease in wholesale gross margin over the same time period. Management believes that the aspirational buyer was negatively affected by macro factors, particularly the European energy crisis and China lockdowns, during the Holiday season, and that this contributed to the weaker trends in 2Q23. Interestingly, GMV for 3Q23 is currently tracking in the same ballpark as it did for the 1Q23, giving the market reason to be optimistic. On the other hand, the slowdown in the second quarter was only temporary, it does indicate that the company is more vulnerable to macro factors than I previously thought.

Customer segmentation

The strategy of taking aim at the true high-end customers seems to be paying off for MYTE. Mytheresa's success in 2Q23 was attributed to the company's decision to cater to actual high-end luxury customers rather than the aspirational shoppers who are more vulnerable to economic downturns. The financial results back this up, with MYTE reporting a 25.3% Y/Y increase in the number of top customers and a 1.8% Y/Y increase in average GMV per top customer on the luxury side. In contrast, MYTE echoed a common theme from Kering (OTCPK:PPRUF) by noting that many aspirational consumers decided to postpone major purchases. Another strong evidence that the aspirational buyer is not the best market is the moderation in Handbags & Shoes (higher max of aspirational customers) in MYTE's business in 2Q. Conversely, the ready-to-wear category, which experienced minimal impact from the holiday season, has the highest proportion of top customers. Hence, I fully support MYTE's decision to shift its focus away from the aspirational customer segment because, in my opinion, this group is far more prone to seasonality and volatility in their purchasing patterns.

With regards to growth trajectory, management has stated that the improved performance in 3Q23 (quarter-to-date) was associated with a lower mix of aspirational customers. And with regards to the strong growth in ready-to-wear categories, it has been fueled by an increase in the proportion of true luxury, wardrobe-building customers in the current quarter. I see this as a promising sign that sends a message about expected demand for 4Q23, which is primarily driven by the spring and summer full-price collections.

Regional growth

Management has pointed to an inflection in growth in China in the 3Q23 as the high point for MYTE regions, with the Chinese consumer possibly recovering in the second half of FY23. Despite a strong 74% US growth last year, MYTE reported 2Q US net sales growth of 9% Y/Y, with the US' share of total net sales increasing to 17.6%. This is a phenomenal performance, with stronger underlying strength at top customer segments and better performance in the aspirational customer segment into the 3Q23 quarter-to-date. Management also reported that GMV growth in Europe has improved compared to the previous quarter, despite negative consumer sentiment across customer cohorts due to the war in Ukraine at the beginning of last year. It looks like the pieces are falling into place for a pickup in growth, but I'm still wary about how much of an acceleration to expect, given that MYTE needs a sizable increase to meet guidance.

Guidance

The new top-line guidance for FY23 from management are 18% Y/Y growth in GMV and 275bps Y/Y growth in adj. EBITDA margin. Management expects 3Q23 gross merchandise volume growth will be below the quarter-to-date trend of 20-21% due to the impact of normalizing comparisons across the full quarter, and that 3Q23 adj. EBITDA margin will be below the 6.0% rate seen in the same period a year ago. 4Q GMV is expected to revert back to above 20%-21% see in the quarter-to-date trend.

Conclusion

MYTE has shown some weaknesses in its recent earnings results, which indicate that the company is more vulnerable to macroeconomic factors than I previously thought. While the company's focus on high-end luxury customers has been successful, its aspirational customer segment is more prone to seasonality and volatility. MYTE's regional growth, particularly in China and the US, has been positive, but the concern is that it needs a sizable acceleration to meet its guidance for FY23. Based on these factors, I no longer recommend buying the stock but instead maintain a hold rating, as MYTE is likely to remain range bound until the market regains faith in the attainability of 2H numbers. However, my long-term thesis for MYTE remains intact, as the company's data-driven platform can provide more tailored recommendations and customer service.