The Cettire Ltd (ASX: CTT) share price has performed strongly in recent months. But is there trouble ahead?
If you’ve not heard of Cettire, it’s a global online retailer. It offers a large selection of in-demand personal luxury goods through its website, Cettire.com. The business has an extensive catalogue of over 1,300 luxury brands and 160,000 products of clothing, shoes, bags and accessories.
What has happened?
Over the last six months the Cettire share price has gone up around 400%. It has gone up around 40% since I mentioned Cettire could be worth putting on a watchlist a couple of months ago.
Cettire is seeing a lot of revenue growth. In the third quarter of FY21, it revealed gross revenue went up 367% to $25.3 million and sales revenue rose 331% to $18.5 million. The difference between those two figures is net of allowances and returns from customers. The number of orders rose by 437% to 36,455.
Unique website visits went up 325% to 3.6 million. The conversion rate improved 26% to 1.01%.
Management said that the strong performance across key metrics reflects the exciting global market opportunity it has, as well as successful execution of its growth strategy, an improved website experience and its offering is resonating with consumers.
But is trouble ahead?
The Australian Financial Review released an article with a headline suggesting that Cettire is working in a “cloud of mystery”.
Cettire’s supply chain was the focus of the article.
Here are a couple of the key sections:
“Fund managers’ chief concern is Cettire’s supply chain.
The online fashion emporium sells about 1300 designer brands such as Prada, Gucci, Saint Laurent, Balenciaga, Burberry and Valentino and Australian designer brands such as Zimmermann.
However, Cettire has no direct relationship with brand owners. Rather, fund managers said it bought stock from third-party suppliers and wholesalers, some of whom operated in the grey market or parallel import market.
More than 90 per cent of Cettire’s revenue comes from international markets and most of its customers (64 per cent) are in the US, according to its prospectus. That means it can sell European designer fashion without 20 per cent value added tax (VAT) and, if US orders are below $US800, free of import duties.
Sometimes, however, its prices are higher than those at brand owners’ stores.
“We have no formal relationship with them,” a Zimmermann spokesman told AFR Weekend. ”Cettire are not authorised to sell Zimmermann products and we could not confirm the authenticity of the products they are selling.”
Other luxury brands featured heavily on the site, including Prada and Burberry, declined to comment.
Investors fear brand owners might eventually crack down on Cettire’s suppliers and stymie its ability to source and sell at a discount.
Cettire has geoblocked IP addresses originating from parts of Europe including France and Italy, preventing brand owners from seeing the products and prices it offers.
“Their competitive advantage is being integrated into these wholesalers around the world – some are in China – and they are significantly cheaper for the same branded goods than their competitors like Farfetch,” said Ron Shamgar, head of Australian equities at Tamim Asset Management.
“At some point as they become bigger and their sales scale up – the current run rate is about $100 million – at some point those branded owners, most of whom are based in Italy, they are going to want to have a say about the price their goods are sold.”
Like rival online luxury goods site Farfetch, which also started out buying from third-party suppliers, Cettire might eventually have to deal directly with brand owners, in which case it would not be able to offer the same discounts.
“There is a risk these brand owners force some of these wholesalers not to sell to Cettire and that could impact them,” Mr Shamgar said”
What to think of this
The AFR said, in an emailed statement, that Cettire dismissed concerns about the sustainability of its business model, but declined to comment specifically on supplier relationships or other issues raised by investors.
A Cettire spokesman said to the AFR:“Cettire has developed a unique and compelling business that provides value to customers and suppliers and is exceptionally positioned within the growing luxury goods market.
“The company is confident in its outlook and will not engage with uninformed commentary.”
Question marks over a company doesn’t automatically mean it’s the worst case scenario, but it’s not good news either. Cettire is an interesting business, but after such a strong run of the Cettire share price, now at $2.52, I think it could be wise to take profit off the table with the high level of expectation that is now built into the price. A more detailed response from Cettire might help things too.
There are other ASX growth shares out there that may have cheaper valuations.