Opinion
Hot luxury to bargain bin: The red flag that should have warned investors
Elizabeth Knight
Business columnistIt’s hard to work out the most spectacular aspect of online luxury goods retailer Cettire’s three-and-a-half year life as a listed company – its moonshot sharemarket rise, its equally spectacular plunge or the fact that its founder has already cashed in $330 million selling stock.
To put that into perspective, the company currently has a market value of roughly $434 million.
Cettire’s reclusive founder, Dean Mintz.
For investors, there are lessons to be learned from jumping on board a hot stock – hyped by brokers bored by an otherwise uneventful market for the past couple of years in a dearth of new listings.
Witness the excitement of this month’s float of Mexican fast food chain Guzman y Gomez: It was the financial media and financial market’s equivalent of the birth of a royal.
Anyone looking for anti-Cettire grist can find an abundance on social media – tech guys throwing shade on the business model or mainstream media casting doubt over incorrect collection of import duties, poor customer reviews and even the authenticity of the high-end product it sells.
All of these chinks have opened the door to short sellers – the investors who make money betting on falling share price.
So there were a lot of naysayer told-you-sos around this week when the company missed profit expectations by a large margin. And it certainly wasn’t helped by the founder Dean Mintz living up to his reputation as a recluse – which shareholders read as arrogant and unwilling to engage with the investment community.
For me, it is Mintz – or actually, his three large stock selling events since the company listed in 2021 – that is this company’s real red flag. It isn’t the claim by a short seller that Cettire is selling knock-offs. That would be a company killer and for what it’s worth has been robustly denied.
Criticism about the company pocketing some import duties that should have been paid to the government is a more complex issue that has resulted in some changes to the way it discloses such duties. But the company says that the amounts were insufficient to move the dial on the revenue line.
The founder selling red flag got larger this week when the share price halved after a market update revealed profit has essentially stalled in the final quarter of the current financial year.
It is Mintz’s three large stock selling events since the company listed in 2021 that is this company’s real red flag.
After the first nine months of the financial year, the company announced it had already earned $32 million. But in the fourth quarter, it was budgeting for earnings of zero to $3 million.
What is scary about this profit update is that if you annualise the fourth quarter, Cettire would earn between zero and $12 million if the conditions that have eaten its last quarter profit continued next year.
In March, Mintz pocketed $127 million after selling a 7.2 per cent share parcel at a time when the stock was trading at $4.83 – close to an all-time high. He received $4.63 for his stock and reduced his stake to 30 per cent.
Sure, the company says that investment bankers made him do it because a stock’s liquidity is important. But it is hard to convince any investor (even a founder) to sell if they think the price is rising, so that reason always has shaky legs.
But the reason the shares crashed this week was because there is little margin for disappointment for growth stocks.
They become broker and investor darlings because they have a hockey stick earnings profile that can’t have a plateau kink.
To be fair, the Cettire business model has a lot of attractive features that other retailers don’t.
To begin with, there are no costly physical stores on which to pay leases and to staff. Another tick is that Cettire holds no inventory, rather it acts to match orders it receives with wholesalers or distributors.
Cettire currently has a market value of roughly $434 million.Credit: Dominic Lorrimer
And it has a skeleton staff – around 70 compared with online rivals that employ thousands. Plus, Cettire says it has superior software that seamlessly covers orders and fulfillment. But competitive advantage can easily evaporate when the market sours.
The soft demand for luxury goods being felt across the board has caught Cettire in its wake. Retailers including this former market darling are discounting – all of which is playing havoc with margins and profit.
Investors didn’t appear to factor in this possibility as they were dazzled by the company’s growth prospects.
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