MYT Netherlands: Double-digit customer growth and cheap (NYSE: MYTE)

E-commerce developer MYT Netherlands Parent BV (New York Stock Exchange:myte) recently reported double digit customer growth in the first quarter of 2023 and a successful performance of the company’s mobile application. In my opinion, if management continues to compile information about customers and costumes directions, the fair price will be much higher than the current market price. I fear the dangers of the regulations of the luxury market and the failed predictions of new trends; However, the share price seems very low at the moment.

Significant experience with e-commerce and double-digit customer growth

MYT Netherlands Parent, through its subsidiary Mytheresa, offers an e-commerce platform for high-end fashion and designer apparel. I think it was great reading the company after reviewing the latest agreements with luxury brands that have been reported recently Presentation to investors.

MYT Netherlands does not manufacture or design the products. It only has an online platform. Hence, management seems to be an expert in analyzing new trends for each season, agreements with product supplier brands, and marketing and communication strategies to put together this platform. In line with these words, I must say that the management seems to be very successful. In the first quarter of 2023, the number of customers increased by double digits, with average spend per customer also increasing.

Solid balance sheet with plenty of cash and little debt

As of September 30, 2022, the Company reported intangible assets and goodwill of €155 million, as well as property of €22 million and right-of-use assets of €45 million. Total non-current assets are close to €229m, with inventories worth €262m and other assets worth €32m. Finally, cash amounted to 87 million euros, with total current assets of 388 million euros and total assets of 618 million euros. With an asset/liability ratio of more than 3x, I think MYT balance sheet It looks totally solid.

Reported liabilities included rental liabilities of €39m with deferred tax liabilities of €4m. Total non-current liabilities were close to €46m with tax liabilities amounting to around €21m. Besides, contract liabilities amounted to 10 million euros plus trade and other payables close to 45 million euros. Finally, the total current liabilities are €136m with total liabilities of €182m.

2023 analysts’ guidance and forecasts look helpful

In my financial model, I like to include guiding numbers from management. Net sales for 2023 will approach €755-800m with sales growth of approximately 16%-22%. Adjusted EBITDA will stand close to €68 to €76 million, which means an EBITDA margin close to 9%-9.5%.

In my opinion, the analyst numbers are also optimistic. 2025 net sales will be €1.100 billion with net sales growth of 18.41%. EBITDA for 2025 is €107m with 2025 EBITDA of €91.3m. Operating margin will be close to 8.30% with an EBT of €86m. Finally, net income will stand close to €62.5m and free cash flow for 2025 will be approximately €35.3m with a CHF margin of 3.21%.

Better mobile app applications can result in a fair price of $28.3 per share

In my opinion, Mytheresa combines a lot of knowledge about the needs of a global segment of the population – mainly in Europe and the US – valuable information about cost management, and a shrewd observation about the possibilities of technology when it comes to scaling up business. Under this case scenario, I assumed that this accumulated knowledge would most likely lead to revenue growth and financial profit margin generation.

According to its most recent annual report, MYT Netherlands currently has active operations in 130 countries, reporting more than 781,000 active customers. Almost 50% of purchases were made through its digital app (not its website). I think further improvements in the company’s mobile and tablet applications could bring significant revenue growth. Let’s keep in mind that the global mobile application market is expected to grow at a compound annual growth rate of more than 13%.

Mobile purchases by customers in general, and by our customers in particular, have increased exponentially, and we expect this trend to continue. In fiscal 2022, mobile orders accounted for 50% of our net sales, of which 38% were app orders, and approximately 79% of page views were generated via our mobile, tablet and mobile apps. (Source: 20-F)

The global mobile application market size was US$ 187.58 billion in 2021 and is expected to grow at a CAGR of 13.4% from 2022 to 2030. (Source: Mobile Application Market Size, Engagement, and Trends Report, 2030)

I also think that MYT Netherlands stock could be a great asset to protect investors from inflation. Let us keep in mind that luxury products do not suffer a significant drop in demand in periods of inflation. In this regard, the management noted the following information.

Luxury demand worldwide has been less affected by demand shifts due to inflation than other industries. Source: 10-S

Given the previous assumptions, I included 2033 net sales of €3.608 billion with net sales growth of 18.79%. 2033 EBITDA will be 353.33 million euros with a 2033 EBITDA margin of 9.79%. 2033 will be EBITDA of €317m with an operating margin of 8.79%. 2033 Free cash flow will be 172.9 million euros with a foreign currency conversion margin of 4.79%.

If we include WACC of 7.99%, FCF’s estimated net present value would be close to €497.5 million. Besides, with an EV/EBITDA of 13 times, the final value will stand at €4.593 billion. The NPV for the final value will stand at 1972 million euros.

Under this scenario, my results would include an enterprise value of €2.46 billion, accompanied by cash of €113 million and debt of €10.70 million. The implied equity valuation will stand at €2.572 billion. The fair price is $28.38 million and the internal return is 7.26%.

Contract renewal risk could mean a valuation of $6.58 per share

The luxury digital commerce market is effectively competitive, which forces Mytheresa to constantly innovate along with providing high-quality service to its customers. Obviously, this level of competitiveness is a risk factor for the company. However, it must also be taken into account that due to the high cost, luxury goods are not very accessible at a collective level, which leads to a direct dependence on consumers, who must have a large income to make these purchases. Given the forecast of the economic crisis of 2023, the purchase of luxury goods may be reduced directly, since none of the products on its platform are a vital necessity, and it is not part of an active business network, unlike technology companies.

In the same way, the renewal of the contract with the brands is essential for future operations because the transition of these brands to other platforms may mean a decrease in the quality of their products as well as their image to consumers. Some of these brands have created exclusive agreements for certain products, which are launched on the market in the Munich store and on the digital platform before anywhere else.

It is difficult, in the case of the fashion and apparel industry, to make reliable forecasts for the future, because consumer trends and needs change year after year. Misreading consumer trends can lead to a significant decline in profits and MYT growth in the Netherlands. Under this scenario, I assumed some failures, which could result in lower free cash flow margins, lower fair value.

Finally, as a major risk factor, we can highlight that the change in regulations for companies of this type in the coming years in China, the US and the rest of the world may prompt Mytheresa to readjust its strategic plans and business.

Under the previous conditions, I assumed 2033 net sales of €2.862 billion with an approximate net sales growth of 12.50%. 2033 will be EBITDA of €100.18 million with an EBITDA margin close to 3.50%. 2033 EBIT will be close to €71.6m with an operating margin close to 2.50%. Finally, FCF will stand close to -€42.9m with a FCF margin of -1.50%.

Assuming a WACC of 8.50%, the net present value of future forest inflows would be close to €187.2 million. Furthermore, if we assume an EV/EBITDA multiple of 7.5x, the 2033 final value would be close to €751.4 million, and the final value NPV would be €306.3 million.

My results will also include an enterprise value of €493.49m, along with cash of €113m and debt close to €10.70m. Equity will be close to 596 million euros. Finally, the fair price will stand at $6.58 per share, and the internal rate of return will be -1.83%.

Takeaway

Looking at past customer growth figures and mobile app usage, it seems that MYT Netherlands knows very well how to run its e-commerce business. I think more investment in Ease of use of the applicationSuccessful escalation of the business and adequate information on customers with sufficient income are likely to lead to revenue growth. In my opinion, the company appears to be undervalued. In my base case scenario, I’d have an internal rate of return greater than 7% and a fair value close to $28.3 per share. Under my down case scenario, which included risks from luxury industry regulation and non-renewal of contracts with some brands, the implied valuation was $6.58 per share.