Brokers turn on Cettire after profit downgrade
Brokers have turned on former market darling Cettire, slashing their price targets in half after the online fashion retailer’s shock profit downgrade led them to question whether the company could restore its earnings power.
Cettire blamed intense discounting by its failing competitors as the factor behind its falling margins after it told the sharemarket its profit would be more than 20 per cent below the consensus estimate, implying an unprofitable fourth quarter.
Cettire shares traded lower on Tuesday. Dominic Lorrimer
But analysts are worried Cettire’s downgrade is evidence of broader problems and may reflect changes to its business model prompted by media scrutiny.
Barrenjoey analyst Aryan Norozi said he was inclined to believe Cettire that industry discounting was behind its profit miss but “given the magnitude and timing, we question whether there is a structural risk post Cettire’s pricing changes and recent media inquiry into duties”.
He said if “these issues are structural then Cettire has little valuation ‘floor’”.
In March, Cettire announced changes to its check-out process where customers would no longer be charged duties separately but would be charged an all-inclusive price, while duties on returned items would be refunded.
The changes followed a series of articles by The Australian Financial Review. They detailed how Cettire charged customers duties on a basket of goods that were not paid to customs officials, and in the United States declared goods at a lower value than the amount charged to customers, lowering duties paid relative to duties collected.
On Monday, the Financial Review revealed further issues. Cettire appeared to be applying one harmonised system code, used by customs authorities to identify products and duties rates, when billing the customer and another at customs. In one instance, the customer paid 16.4 per cent duties on a coat, but the item was declared as a sweater with a 6 per cent duty rate.
Cettire’s chief financial officer, Tim Hume, said it did not seek to profit from duty charges and said the harmonised system codes were not determinative in calculating duties.
Shares in Cettire traded 2.2 per cent down in Tuesday’s session at $1.11 after a near 50 per cent plunge on Monday that wiped more than $400 million off its market capitalisation,
Mr Norozi said that “some of Cettire’s downgrade is cyclical, however, its change in pricing policy and recent inquiry into its business practices also contributed to its downgrade”.
He cut his price target from $4.50 to $2.60 as he slashed its 2025 earnings forecast to just $15 million. That’s less than half of the $32 million figure Cettire said it would likely achieve in the 2024 financial year.
But he’s anticipating a recovery in 2026 and 2027 earnings, which supports his $2.60 price target.
Meanwhile, RBC Capital Market’s Wei-Weng Chen cut his price target from $3.80 to $1.50 and forecast a slight increase in profits in 2025 to $33.1 million.
He said Cettire’s negative weak quarterly profit coincided with a softening in the luxury market and “changes in CTT’s business practices resulting from heightened investor and media scrutiny”.
“The extent to which either or both have impacted on FY24 results is not clear to us and therefore makes it difficult to have confidence in the stock or earnings outcomes”.
He said a share buyback was unlikely despite the company’s $100 million net cash position because slowing or negative growth “could result in a material unwind of CTT’s cash balance”.
He also noted the adjusted earnings guidance of $32 million to $35 million excluded the “unquantified level of costs associated with managing Cettire’s negative media scrutiny”.
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