Is Cettire all it's cracked up to be?

If there was one stock that has recently split Australia's investment community, it's ASX-listed luxury e-commerce player Cettire (ASX: CTT). 

With just 37 staff (according to LinkedIn) on its payroll, Cettire services 644,026 active customers who each spent an average of $832 on the retailer's discounted luxury goods in the third quarter, as noted in the company's latest update. 

It also supplies more than 500,000 products, the face value of which is worth around $2 billion, across 2,500 brands, in 53 geographic markets. 

It does this while holding no inventory, and instead, uses a drop-shipping model. This means Cettire does not handle any product directly but uses third-party suppliers to source and store products, and ultimately ship these to customers. 

On April 12, the company reported adjusted EBITDA for the March quarter of $6 million, $90 million in net cash on its balance sheet, and a 95% uplift in gross revenues to $256.7 million - 62% of which was derived from repeat customers. 

This is surprising, given that 85% of the company's product reviews are overwhelmingly negative. Customers speak of their "horrific" experience with "faulty items", of "horrendous customer service", and of "tampered product". One goes far enough to label the website as a "scam". 

I should say that Amazon, equally, has terrible reviews, with 83% of its reviews being negative. Similarly, 74% of the reviews for Farfetch and 78% of the reviews for Net-A-Porter, two of Cettire's competitors, are negative. So, it's possible that customers are more likely to leave negative reviews than positive ones. 

In comparison, Cettire has over 84,227 reviews on Trustpilot, with 67% 5-star reviews and only 21% 1-star reviews - which may better align with Cettire's statement that 62% of gross revenues are derived from repeat customers. That said, Farfetch and Net-A-Porter have 39,813 and 5,350 reviews respectively, while Amazon has 30,401 reviews on Trustpilot. All of these companies are obviously significantly larger than Cettire, which raises questions in itself. 

I should also note that while the vast majority of reviews for Cettire on Trustpilot are positive, some are equally worrying to those on Product Review - with several customers claiming to have received damaged products, the wrong products and/or missing products... This is interesting, given Cettire's quality control process outlined in its T&Cs. 

A quick look at Glassdoor, which allows employees to provide anonymous reviews of companies, isn't much better. 

Then, of course, there has been the media frenzy surrounding the stock. In March, Cettire was forced to respond to an article by the Australian Financial Review that alleged Cettire may not be fulfilling its obligations when it comes to paying customs duties on orders. 

However, Cettire bulls argue that Cettire’s duties policy is in line with general market practice by comparable retailers, with nuances reflective of the company’s own commercial framework.

Meanwhile, a few weeks ago, a substack short seller also sounded the alarm after finding that Cettire was not registered for state taxes in California or Texas. You can read more about that from my former colleague Jack Derwin over at Capital Brief.

On April 12, Cettire management responded to the allegations, arguing that it is, in fact, registered for sales taxes in California and Texas.

On the back of this release, the same substack short seller argued that Cettire's sales tax collections should be 20% higher than reported. 

They also noted that the company's claim to be registered in states covering 99% of US sales "fails to reassure" - given that Cettire is still not registered for sales taxes in states covering 1% of their sales. They also note that the release did not make mention of whether they were registered for, collecting and paying taxes at the beginning of Q3 - or the previous periods when Cettire was obliged to. 

However, it could be that Cettire does not currently have registration obligations in states that account for 1% of their US sales. Bulls have also argued that estimating a 6.3% tax rate versus a 7.5% weighted average was "overly simplistic" and does not consider the exemptions relating to sales tax in each state. For instance, an exemption on sales tax is provided for most clothing and footwear in New Jersey and Pennsylvania. 

At this stage, whether you believe management or not, Cettire is either telling the truth or lying to the market. We are getting to the point now where investors are becoming desensitised to all this negative news... I sure am.

So, has Cettire cracked the code when it comes to luxury e-commerce? Or is it just a house of cards? 

To find out, Livewire spoke with Wilson Asset Management's Oscar Oberg and substantial shareholders Philip King and Jessica Farr-Jones of Regal Funds Management for the positive side to the Cettire story.

Unfortunately, I was unable to find a short seller or bear willing to go on the record, but I will summarise their findings anonymously below. 

Cettire management declined to answer questions put to them by Livewire. 

The bear case

Several fund managers who wish to remain anonymous are negative on the Cettire story. Typically, they will cite the following reasons for why they are cautious about the stock: 

1. The CEO selldown: 

Over the last 12 months, CEO Dean Mintz has sold two major chunks of shares in the company. The first was revealed on 8 August 2023 (worth $100,000,002) and the second on 4 March 2024 (worth $127,325,000) just before the AFR's duty payment investigation was released. The company's board has also sold nearly $4.5 million in stock over the same period. 

The question then arises, if Mintz believes Cettire's future looks bright, why the huge divestment? Particularly, after the AFR has reached out for commentary on a piece that would be published a few days later. As the line immortalised in the 1970s classic All the President’s Men says, “Follow the money”.

2. Supply chain vulnerability:

According to Cettire's 2023 Annual Report, the company "does not have exclusive arrangements with branded goods suppliers, with many of its supply agreements being relatively short-term and/or terminable at will." 

This means there is a risk that Cettire may not be able to source products from existing or new suppliers and service providers "at favourable prices, on favourable terms, in a timely manner or in sufficient volume or quality". 

So, how could these relationships fall through? 

According to one anonymous bear, when Cettire and its ilk were small they were just a minor nuisance to luxury brands. Now, the grey market in which they operate has exploded and is worth a quarter of a trillion dollars globally. This could see brands crack down on wholesalers so they can secure a bigger piece of the luxury pie. They may not, but they could. 

In the Key Risks section of the report, Cettire also notes that there is a risk that "branded products offered and supplied for sale through Cettire's online platforms may infringe the intellectual property rights of third parties", which could "expose Cettire to allegations, claims and litigation from such third-party intellectual property owners". 

This could be interpreted to mean that Cettire believes there is a risk that it could be sued by luxury brands. If so, this is another lever that luxury brands could use to damage the likes of Cettire, should they want to. 

3. Extreme secrecy:

CEO Dean Mintz has reportedly never given an interview, which is pretty much unheard of. He's also apparently hard to get a hold of. According to one bear, a senior executive at a large broker has tried to meet with them on five different trips to Melbourne over the last few years and has been rebuffed on each occasion. 

Cettire has also not revealed who its suppliers are - although this makes sense if it wants to stop luxury brands from cutting off its supply. 

4. Governance red flags: 

Cettire has a very small board, consisting of only a chairman and three directors - one of which is the CEO and founder, Mintz. None of these directors, other than Rick Dennis who once was the COO of a jewellery retailer, have experience working in fashion. 

The company is also rated poorly by multiple vendors on its ESG ratings. For example, it ranked 484 of 514 retail companies by Sustainalytics. 

Then, there's its auditor, Grant Thornton. While I am not suggesting that Grant Thornton has done anything wrong in its relationship with Cettire, in the past, it has been involved in numerous scandals - including the bribery of public servants and criminal charges over the alleged audit failure of iSignthis. 

5. Financials/valuation: 

According to Factset, debtor days have doubled in the last 12 months. This is the amount of time it takes for a business to get paid by a customer (i.e. cash collection on sales made through credit lag the receipt of goods). This is an important metric for cash flow, as it can leave businesses chasing customers for payment of received products. 

Another bear, Adam Schwab, the co-founder and CEO of Luxury Escapes, recently suggested that Cettire could be capitalising wages to flatter its earnings. 

Cettire's balance sheet, with $99.8 million of cash at December 2023, appears strong. However, as one bear notes, this cash is offset by $90 million of payables. 

If growth were to slow, we could potentially see a cash crunch, with Cettire taking in less cash from customers while still having to settle with its suppliers. 

Bears believe it is also curious why, with almost $100 million of cash on the balance sheet, the company received just $677,513 of interest on this cash (i.e. less than 1% interest). This is strange given that a quick survey of the Livewire office revealed that most are getting around 4-5% on their cash right now. 

In addition, one bear questions Cettire's higher margins, given its website gets 50% of its traffic from paid search (compared to 22% at Farfetch). 

Brokers also seem split on the outlook for the stock, with Bell Potter analyst Chami Ratnapala downgrading Cettire to a "hold" from a "buy" on April 1, and then upgrading the stock once again on April 15 to a "buy". 

6. Other risks

Other risks include the retention of duties, as mentioned earlier in this piece, and question marks around culture (given the company's poor Glassdoor reviews). 

One bear also points out that Cettire is geo-blocked in Italy, France and Spain, which could speak to its ability to maintain supply relationships with luxury brands and wholesalers. 

In addition, while bulls cite Cettire's China launch as a reason to stay invested in the stock, Cettire first mentioned a China launch in November 2022. Short sellers suggest the timing of the re-announcement could suggest that Cettire is trying to keep growth going amid higher scrutiny around sales tax and customs duties in the US and Australia. 

On Thursday, one Twitter user noticed that the company's website for China was live and was charging a duties and tax rate of around 37.4%. According to the website, duties, taxes and shipping charges are non-refundable in this region. In Australia, for comparison, returns incur a fee of $30 per item, while orders over $1000 incur an additional customs fee of $88. 

On Thursday night, a Cettire spokesperson confirmed the website is not live but in a test phase where the site will be intermittently visible. They said that the information on the website is not informative of Cettire’s approach to the China market as it is in a testing phase.

The bull case

Oberg and his team first bought into Cettire in November 2022 after doing a lot of work speaking with suppliers, customers and competitors - and meeting with the company several times. It remains a small holding. 

"Despite everything happening in the press, we still own shares now because effectively their largest competitor, Farfetch, is struggling and almost went under. And that is a huge amount of revenue that could potentially go to Cettire," Oberg explained.

"This is not like other e-commerce companies on the ASX in the sense that Cettire is a logistics company rather than a retailer. They are trying to find the cheapest, most efficient way to get the goods from a distributor, wholesaler or retailer to the customer's hands."

Oberg believes management has been transparent and factual with their ASX releases since the bears started circling the e-commerce player. He argues that the negative news has gotten to the point now where the numbers need to do the talking - and he thinks they will.

"When it comes down to it, we invest in companies where we think earnings are going to beat expectations and to be fair, this business hasn't stopped doing that for the 18 months we have owned the company," he added.

Meanwhile, Regal Funds Management is a substantial holder in Cettire, holding 14.17% of the company's shares on register.

Regal noted that despite only being founded in 2017 and listing just over three years ago, Cettire has rapidly become a global leader in the fast-growing luxury e-commerce sector.

"CEO and founder, Dean Mintz, has built a tech-focused, highly automated, asset-light and scalable business that was bootstrapped until the IPO, only ever raising $40 million of primary capital," King and Farr-Jones said.

They noted Cettire’s impressive track record of organically growing revenue from $6 million in FY19 to approximately $750 million in FY24 - a compound annual growth rate (CAGR) of around 165%.

“Despite the law of large numbers, Cettire is continuing to compound gross revenue at an extraordinary rate of 88% even before it launches in China this quarter, as per its latest update," King and Farr-Jones said.

They believe Cettire can continue to compound its earnings and revenue organically at a high rate for years thanks to the following reasons:

1. Cettire continues to enjoy fly-wheel effects associated with a rapidly growing demand profile and supply chain,
2. It continues to take share from embattled competitors such as Farfetch, and;
3. It is pursuing further geographic expansion (e.g. imminent launch into China, the largest luxury market in the world).

Regal has also responded to several of the bear's red flags. 

On the CEO selldown, while they agreed that selling shares can be a red flag, they argued it can also be "prudent financial management". Mintz remains Cettire's largest shareholder, with a material 30% stake valued at over $365 million.  

On supply chain vulnerability, Regal disagreed that the grey market has exploded, suggesting luxury brands had consistently been selling approximately 10-20% of total volumes into wholesale channels and that Cettire was still only capturing a small share of this TAM.

Regal also said that Cettire has done a "fantastic job" growing and diversifying its supply chain - and argued it has "never been stronger".

"We have conducted numerous calls with European luxury wholesalers/retailers... These calls have reinforced the importance of this channel in generating incremental demand from their global reach," King and Farr-Jones said.

"Many suppliers praised Cettire as a fantastic partner whom they will seek to do more business with as Cettire generally offers seamless technical integration and superior margins versus competitors.”

Regal also does not share the bears' concerns on governance red flags, and argues that chair Bob East is a "highly experienced and credentialed board member". They also reason that scandals could be linked to any of the large accounting/consulting firms, such as the recent PWC saga. 

When it comes to financial red flags, Regal believes that debtor days have been relatively stable ($18.5 million receivables vs. $354 million sales in 1H24 compared to $8.5 million receivables vs. $188 million sales in 1H23). More importantly, they argued it is "irrelevant" for Cettire given its negative working capital model.

“We saw this negative working capital model clearly in the 1H24 when Cettire reported $65 million in operating cashflow versus $26 million in adjusted EBITDA. Cettire’s receivables balance at 31 December 2023 is only $18.5 million and simply reflects money due for input VAT or GST credits," King and Farr-Jones said. 

They also argue Schwab's “concerns around cost capitalisation are unfounded given their immateriality on both an absolute basis ($7.5 million in 1H24 versus $65 million operating cash flow and $26 million EBITDA) and relative basis versus other technology companies."

While Cettire originally utilised Shopify front-end software to "prioritise speed to the market", Regal believes it has since built its own proprietary front-end platform to facilitate better localisation, moving off Shopify in 2021. 

On the issue of valuation, Regal suggested: “Cettire’s PE multiple is actually materially lower than Nvidia from FY25 onwards reflecting Cettire’s superior growth profile over the coming years".

"We believe Cettire offers compelling value at approximately 23 times FY24 consensus EBITDA while offering exposure to compelling structural market tailwinds from growing e-commerce penetration, extraordinary organic revenue growth, strong profitability and material free cash flows. We have used the recent retracement as a buying opportunity," King and Farr-Jones added. 

Regal also noted that cash flow and payables balances are all consistent with typical retailer seasonality and Cettire’s negative working capital model.

“Cettire’s rapidly growing profitability and cash balance have led it to consider capital management and we believe the potential near-term declaration of a maiden dividend would be well received," King and Farr-Jones said. 

When it comes to geoblocking, Regal believes that Cettire is not accessible in certain high-traffic markets such as India, Turkey and France as it has not set up fulfilment capability to prevent negative customer experiences in these regions - meaning, customers in Turkey, for example, can access the website but cannot checkout. 

On April 12, Cettire released stellar third-quarter results - with sales revenue lifting 88% to $191 million and a margin of over 20%. It also confirmed that it would be launching into China before the end of the financial year. This has been highly anticipated by bulls following the stock. 

And yet, investors sold Cettire shares in droves, with the stock's share price down 6.87% on the day. This is worrying, given if a stock's share price falls after announcing a beat, it probably does not bode well for when misses inevitably occur. 

Over the past two months, its share price has fallen 36%. 

All in all, there's no doubt that Cettire is a high-returning ASX growth company. But whether it's worth the risk is another question altogether.