Cettire - retail run as tech

Business model

Cettire (ASX: CTT) is an ASX-listed luxury fashion e-commerce business. Stocking over 500 designers, including brands such as Bottega Veneta, Prada and Balenciaga, CTT sells products globally below RRP. The business operates by using an in-house algorithm to source the lowest cost products to then on sell them to their customer base. The business generates 60% of its revenue in the United States and 10% in Australia, with plans to expand its market exposure in the 53 other markets the company services.

CTT: ASX Share price since IPO (A$)

The share price has been volatile as broader e-commerce sentiment has boomed through Covid, followed by a short term bust. More recently CTT has forced the market to re-rate it by pursuing “profitable growth” – something we often see lacking in ASX mid-cap technology names.

CTT operates its business as a tech platform

CTT uses proprietary technology to automate business processes with minimal labour intervention. While many businesses tout the term “proprietary technology”, indeed this is cliché among ASX technology unicorn hopefuls, we think CTT has been able to execute a more efficient process - which is technology enabled. Being a relatively new company has allowed CTT to avoid being weighed down by the problems of incumbency. At it’s core, the technology can process and fulfil large order volumes at the lowest cost price. This enables CTT to operate a no-inventory model, minimise running costs, and have an employee headcount of only fifty people, ultimately benefitting business efficiency compared to competitors (see below).

Sector employee headcount

Suppliers

CTT sources the majority of its projects via its proprietary algorithm which sources the products from multiple suppliers, to gain a price advantage and minimise key-supplier risk. CTT also has some agreements with brands enabling direct access to the brand’s products.

Investment highlights

1. Automation equals profitability

CTT is an online retail business being run as a tech company, meaning it has a high degree of operating leverage.

• No inventory model
• Marketing expenses are focused on customer acquisition, decreasing overall marketing expense relative to comps
• The business runs using c. 50 employees, compared to competitor Farfetch with c. 6,700 employees. Cost per employee at CTT is A$77k cf. A$155k at Farfetch

Marketing expense as a % of revenue

2. Small player in a large growing market

We like the dynamic of a small operator in a large global market. CTT is committed to global customer acquisition and runs a lean business model that can be replicated in additional markets to drive growth.

Sales growth/(decline) between most recent audited reporting periods

CTT holds a very small market share of a large and growing sector. Farfetch is CTT’s closest competitor, holding only 1.7% of the share in the global fashion e-commerce sector. This level of market segmentation reveals an opportunity for CTT to implement growth strategies and scale its profitable business model.

Market share of e-commerce retailers

Online sales are trending upwards in the retail market 

3. Attractive unit economics due to customer loyalty

CTT’s customer acquisition cost is A$93, while the delivered margin per active customer is A$300. Clearly these positive unit economics which are being aided and abetted by growing customer loyalty are driving profitable growth.

CTT’s customer loyalty is becoming stronger overtime, even as its customer base expands

While CTT does not disclose its average customer life, we suspect that due to the high level of market concentration, and therefore competition to win customers, the average lifespan of a customer is short (< 1 year) compared to other sectors.

However, our research indicates that CTT’s customers are increasingly loyal due to:

Product:

• Luxury goods at a discounted price
• New season luxury stock available for sale

Branding:

• Customers trade the in-store luxury experience for lower prices and the convenience of online shopping
• As CTT does not deal in second-hand luxury goods, authenticity is not a branding risk (cf Farfetch, The RealReal)

Customer experience:

• Attractive sales/flash sales
• Ability to build a customer profile
• Apple Pay and Afterpay available, increasing the website’s ease of use
• Free shipping on orders over A$300
• Free insurance is provided with every delivery
• However, we note that CTT’s difficult return policy (and lack of availability to exchange products) may decrease customer satisfaction, we expect this as a side-effect of running an efficient, low-cost, automation-focused business

Revenue per active customer (A$m)

4. Valuation

At current prices looking backwards, it appears stretched (46x EBITDA, and 3x sales), however, this is what we often see with high-growth companies (at a reasonable price).

In this case, CTT’s growth is c. 100%, and we think there is a degree of operating leverage, which therefore requires us to model forward to come to a more accurate view around valuation.

On balance, because of the growth and profitability, we think this deserves to be modelled on a forward looking basis. Therefore the current market price of A$2.91 offers an attractive entry point to investors.

Risks

The business does not operate without risks, however, we perceive them as manageable.

Counterfeit risk to brand:

• Given CTT does not operate in the second-hand reselling of luxury goods, this risk is relatively minuscule compared to competitors that do trade in this space (e.g., Farfetch, The RealReal).

Supplier risk:

• CTT relies on suppliers to facilitate their no-inventory model business
• However, given the business model uses an algorithm that diversifies supplier usage, there is minimal concentration risk due to the supply chain’s breadth and depth in sourcing over 400,000 products

Unit economics risk:

• Currently, the cost of customer acquisition for CTT is low. We interpret this to be due to the low level of market concentration
• Should the market become more concentrated, the cost of customer acquisition would rise, decreasing profitability
• However, given CTT’s current market share (<1%), and high customer loyalty, we don’t expect this risk to eventuate in the near future

Company management:

• As with all companies, there is a risk that the company engages in reckless financial management projects; for example, non-strategic M&A, dilutive raisings, scrip transactions etc.

About VP Capital

VP Capital is an actively-managed investment fund manager based in Australia, targeting opportunities across the capital spectrum.