Shares in luxury retailer Cettire Ltd (ASX: CTT) took a 21.4% dive yesterday morning before being placed into a trading halt pending a further announcement.
Still, yesterday’s drop doesn’t look too bad considering Cettire’s shares have still returned 18% over the past month, and a whopping 296% over the past six months.
CTT share price
Recent developments
Yesterday’s fall in the share price was likely the result of the market digesting an article out of the Australian Financial Review over the weekend.
The article raised concerns over Cettire’s business model and supply chain. It noted that rather than having direct relationships with suppliers, it instead buys stock through third-party suppliers and wholesalers, some of which operated in the grey market or parallel import market.
This might not necessarily be a bad thing, however. Farfetch – a rival luxury retailer, started out with a similar business model when it was a much smaller company.
The implication here is that high-end brand owners could crackdown on Cettire’s current suppliers, meaning it might not be able to source the same luxury brands with the same discounted prices.
Cettire management seemed to dismiss the concerns raised and reassured investors that it had a compelling business that was well-positioned within the growing luxury goods market.
Cettire’s response
Cettire provided a response to the ASX, which explained the reason behind the drop in the share price.
It told the ASX it believes it has minimal concentration risk due to it having a large and diversified global network of suppliers.
It was previously noted that the Cettire website has been blocked in certain countries such as France and Italy. Some suggested this was to prevent luxury brand owners from seeing the prices for which Cettire sold them.
Cettire management denied this claim and said it’s not accessible in certain markets as the company prioritises its global expansion. After thinking about this comment for a while, I’m still unsure of what it really means and how it could justify blocking a select few countries.
Was the sell-off justified?
I don’t think last weeks’ article provided information into Cettire’s business model that wasn’t previously known. Investors who had researched the company even to a basic level would’ve likely known how it sources its products and the inherent risks involved.
Today’s sell-off might not have been completely justified, but it’s also worth considering how hard Cettire’s shares have run in the past six months.
It’s fair to say that many shareholders would be taking some profits off the table while the share price is still relatively high.
Time to buy Cettire shares?
Given how hard Cettire’s have run recently, its valuation might be worth considering.
If Cettire achieves its guidance figures and reaches $80 million in FY21 revenue, this would put shares at around 10x forward sales.
If the company can keep achieving high levels of revenue growth, this could easily justify the current market cap, but it definitely seems to have some optimism priced in.
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