Move into profitability in Q225

GFG demonstrated continued good constant currency revenue growth in its two largest regions in Q225, c 4% in ANZ and c 10% in LatAm. This was offset by ongoing weakness in SEA some of which was due to phasing and management actions to refocus GFG’s range. A combination of improving gross margins in all regions and deleveraging of operating costs led to year-on-year improvements in adjusted EBITDA (€3m in Q225 versus a loss of c €4m in Q224), with the highest Q2 profit since FY21. Free cash flow generation for H125 deteriorated a little versus H124 as the higher profitability and lower fixed capital investments were offset by normalisation of working capital investment.

Profit estimates unchanged

Management’s near- and medium-term financial guidance is unchanged. Our underlying revenue growth estimates are also unchanged. However, the continued weakness in foreign exchanges rates in countries where GFG operates versus the euro has resulted in minor 1–2% downgrades to our FY25–27 revenue estimates. GFG’s natural cost hedge from operations in local currencies and management’s indication it has responded to the currency weakness by generating incremental cost savings means our adjusted EBITDA estimates are unchanged.

Valuation: Significant discount to peers

Our sensitivity analysis shows significant upside for the current share price from a higher rating towards its peers if GFG can achieve the medium-term financial targets. Incorporating the updated net financial position, we estimate upside of 84–135% to €0.69–0.89 per share at current prices when applying a range of discounts, from 30% to 0%, to the peer median multiples and our estimates, which remain below the medium-term guidance. GFG’s current market value is below the net cash position excluding lease liabilities of c €97m, or marginally above when including leases of €56m, indicating the market expects limited cash generation.

H125 results: Profitability progressing nicely

Income statement: Margin gains across the board

GFG’s quarterly and half-yearly results through FY24 and FY25 to date have shown a steady sequential improvement in year-on-year constant currency revenue growth, in most quarters, and profitability at all levels of the income statement, as higher gross margins have been accompanied by lower operating costs.

Before looking at GFG’s underlying performance it is worth highlighting that Q225’s reported revenue growth rate was negatively affected by foreign currency translation, which took the reported decline to almost 8% versus the underlying decline of 0.4%. The currencies of the majority of countries to which GFG is exposed, except Malaysia and the Philippines, depreciated versus the euro through H125, with greater weakness in Q225 following the announcement of the US trade tariffs. Of particular note is the 8% depreciation of the Australian dollar and 15% depreciation of the Brazilian real, given their importance to the group at c 49% and 22% of revenue in H125, respectively. On the plus side, GFG’s local presence in these countries provides a natural cost hedge to the lower revenue. The fx impact on group net merchandise value (NMV) and adjusted EBITDA in H125 was quantified at €30m and €0.4m, respectively.

Following five consecutive quarters of sequential improvements in constant currency revenue growth, there was a move back to minor negative growth in Q225 of -1.2% versus Q125’s 0.9% growth. This reflected a greater decline in SEA of 18.3% versus -10.1% in Q125, alongside continuing strong growth in ANZ of 5.8% and LatAm of 10.2%, while Q125’s growth rates were helped by easier comparatives from Q124 than those faced in Q125.

Here it is worth focusing on the swing in comparatives between Q1 and Q2 as the underlying picture is somewhat better than is apparent by just looking at the lower growth between Q125 and Q225. LatAm’s comparatives improved significantly from -16.5% in Q124 to -5.9% in Q224, a sequential move of 10.6pp versus the the 5.6pp lower revenue growth in Q225 versus Q125. Indeed, in Q225 the LatAm business is showing positive growth on a two-year basis for the first time, not just growth on an easy comparative. A similar trend, albeit more muted and with a slight delay, is apparent in ANZ with a sequential improvement in revenue growth from 3.2% in Q125 to 3.7% in Q225 despite a meaningful ‘improvement’ in the comparatives from Q124’s -18.9% to Q224’s -9.3%.

SEA’s rate of revenue decline accelerated from Q125 to Q225 for a number of reasons, in addition to the ongoing decline in active customers. First, the repositioning of the offer to a more focused and curated range has involved the elimination of a number of low-selling and unprofitable stock keeping units. Second, the earlier phasing of Ramadan in FY25 (which had concluded by the end of Q125) versus FY24 (spread across Q124 and Q224) helped to boost GFG’s Q125 figures and suppress Q225 growth.

In the charts below we show the relative momentum of GFG’s three regions, which are at slightly different stages of their repositioning.

From an active customer perspective, churn rates have improved across all three regions, and in ANZ and LatAm new and reactivated customers exceeded churn in Q225.

In ANZ, GFG’s largest region from a revenue perspective, Q225 saw the continuation of the improving trend in active customers, which has been in positive territory for two consecutive quarters. Q225 was the region’s third consecutive quarter of constant currency NMV and revenue growth. Management believes its revenue growth is slightly ahead of the market. Key developments in attracting and retaining customers have been innovative marketing campaigns and improved delivery capabilities, for example one-to-two-day free standard shipping in Melbourne, twilight delivery in Melbourne and Brisbane, and scaling secure parcel locker pickup in Australia.

ANZ’s gross margin increased year-on-year by 3.5pp from 44.5% to 48.0% in Q225, due to growth in higher-margin product categories and better retail margins overall as aged stock was optimised. This, along with continued cost efficiencies, led to an improved adjusted EBITDA margin of 3.2% in H125 versus -0.5% in H124 (see Exhibit 8).

In LatAm, there was also a continuation of the improving trend in the number of active customers, almost reaching year-on-year growth in Q225, with a small decline of 0.3%. Q225 was the sixth consecutive quarter of an improving trend in active customer declines as a result of better customer retention and replacement. As highlighted in our May initiation note, LatAm was the first region to see the benefits of a restructuring, and is an important indicator of the opportunity in SEA. The repositioning has led to four consecutive quarters of constant currency NMV (c 10% in Q225) and revenue (c 8% in Q225) growth, which, naturally, presents the challenge of lapping tougher comparatives in future.

In H125, GFG trialled a new customer relationship communication tool aimed at engaging target customers who downloaded the app but not signed in within the first week, which led to a more than 20% increase in customer conversion.

LatAm’s gross margin increased by 1.2pp from 45.5% in H124 to 46.7% in Q225, and the adjusted EBITDA margin improved to -1.9% in H125 from -7.2% in H124 (see Exhibit 8).

SEA’s rate of revenue decline accelerated from Q125 to Q225 for a number of reasons, in addition to the ongoing decline in active customers in competitive markets. First, the repositioning of the offer to a more focused and curated range has involved the elimination of a number of low-selling stock keeping units, which naturally provides a drag on overall growth, and is likely to continue to represent a drag on growth into Q126. Management quantified these products as representing a small single-digit percentage of sales in the last 12 months. Second, the earlier phasing of Ramadan in FY25 (which had finished by the end of Q125) versus FY24 (spread across Q124 and Q224) helped to boost GFG’s Q125 figures and suppress Q225 growth. Ahead of the arrival of a new CEO in September, management has already undertaken a number of significant changes in its operations, with a 13% y-o-y reduction in the total cost base, in addition to beginning the repositioning of its product offer to customers. From the end of February 2025, it began to reduce a long tail of non-core and unprofitable products, so there is a greater focus on fewer top brands in the core categories apparel, footwear, accessories and sportswear. These should help to make its website simpler to navigate and make it easier for customers to find products and improve conversion.

Although SEA’s revenue declined, there was great progress with the gross margin improving by 4.5pp y-o-y to 50.8% in Q225, helped by the shift to Marketplace and Platform Services revenue along with actions to manage excess stock.

Profitability improving in all regions

There is a clear picture of year-on-year improvements in the gross margins of the individual divisions, which is contributing to a general improvement in the group gross margin to 47.7% from 44.9% in Q224, despite the weak revenue performance in SEA. In addition to the natural benefit to the gross margin that arises from the growing importance of Marketplace revenue (see our initiation note), GFG’s retail margins are increasing as a result of the smaller, better curated and fresher ranges and therefore lower required discounting.

Further down the income statement, GFG is delivering absolute year-on-year savings in each of its three main operating costs: fulfilment, marketing, and technology and administration, which are providing further margin leverage as NMV grows. In absolute terms, marketing spend reduced to c €33m in H125, versus H124’s c €35m, and was consistent relative to revenue and NMV. There is a natural seasonality to GFG’s fulfilment and marketing costs, with typically higher costs in H2 versus H1 as customer activity and volumes increase with events such as Black Friday and Christmas.

The combination of higher gross margins for each region and leveraging of the operating costs is leading to year-on-year improvements in adjusted EBITDA and margins.

Cash flow and balance sheet

GFG’s normalised free cash outflow (its own definition) was marginally lower in H125 than in H124, which mainly occurred in Q125 as Q225’s cash generation was similar to that of Q224’s. The main driver to the decline in H125 was higher working capital investment offsetting the more favourable moves from higher profitability and lower fixed capital investment. H124’s working capital benefited from year-on-year reductions in inventory and higher payables as supplier payment terms were extended. There were further reductions in inventory by the end of H125 at €95m versus H124’s €101m. However, it was not as significant as the improvement in H124 from H123’s €123m. Management has been clear the easy wins in reducing working capital intensity have already been made, hence the guidance that it will be neutral to GFG’s free cash generation going forward.

GFG’s cash flow is typically better in H2 of a financial year given the seasonality of its revenue and profitability (see Financial guidance section below).

The free cash outflow meant GFG’s pro forma net cash position at end H125 was c €97m, lower than the c €164m at the end of FY24. With €41m of IFRS 16 liabilities, GFG remains in a net cash position of €56m versus €116m at the end of FY24 when we include the lease liabilities.

Financial guidance reiterated

With the H125 results management reiterated guidance for FY25 NMV of -5% to +5% at constant currency versus FY24’s figures and to reach adjusted EBITDA break-even. The weakness in exchange rates of the countries where GFG operates naturally provides a greater headwind to reported NMV and revenue figures than at the start of the year. On the plus side, there is a natural cost hedge from its local operations and management has found further cost savings and efficiencies in response to the foreign currency weakness.

We make no changes to our underlying NMV and revenue growth estimates. However, we trim our reported revenue estimates for FY25–27 to take account of changes to foreign exchange rates since our initiation in May. The seasonality of our FY25 estimates appears consistent with that of FY24, with c 45–46% of full-year revenue in H1 of both years.

We make no change to our adjusted EBITDA forecasts given the natural cost hedge and management’s actions to project profitability.

Valuation

Exhibit 10 shows the growth prospects, profitability and valuation measures for GFG and a range of its e-commerce peers. The valuation continues to look extraordinarily low versus the peers if the company achieves its medium-term financial targets.

In Exhibit 11 we update the sensitivity analysis from our initiation note to indicate the potential upside of the share price if GFG can achieve the medium-term financial targets, thus justifying a valuation multiple more in line with its fashion e-commerce peers.