Seven things every investor should know about Unbound Group

Unbound Group’s core trading business, Hotter Shoes, is a digitally led, vertically integrated retailer of footwear, with a focus on the comfort category. Its new management team has radically transformed the business by closing most of its physical stores, increasing investment in the online experience and regaining its (previously lost) focus on its core demographic with better product differentiation. Management now wants to go one step further. It is developing a curated multi-brand online retail platform, called Unbound. The platform will offer a broader range of new and complementary own-brand and third-party products and services, likely focused on footwear, clothing and wellness. It aims to do this via partnerships with brands that are relevant to its core demographic, aspirational, enhance Unbound’s brand and have strong environmental and sustainability credentials. What does Russell Pointon, one of Edison Group’s consumer analysts, think of the business’s prospects? Here are the seven things we think every investor should know. #1 We value Unbound at 165p per share We use a discounted cash flow valuation for Unbound, which points to £70m, or 165p per share, excluding potential new revenue streams from expected new digital partnerships (see below). The P/E multiples for FY23e and FY24e of 15.0x and 6.9x are at a discount to UK online retailers in both years (21.4x and 18.4x) and a discount to the UK small-cap retailers in FY24e (8.5x). #2 Hotter has a large, attractive customer base The company already has a database of 4.6 million customers and serves over 29% of the female population aged 55+. Its core demographic of people aged over 55 is the wealthiest in the UK, has the highest disposable income and is expected to be the fastest growing group as the population ages. Given these consumers are underserved online and offline, this could provide a favourable tailwind to management’s ambitions. #3 Positive trends continue Hotter’s FY22 revenue growth of 16%, including 10% in Q422, had a broad base, with double-digital increases for both online and offline sales. During H122, Hotter’s UK website showed a consistent improvement in visits, order volumes and gross order value. Management attributes this to more efficient direct marketing and a better user experience on the website. These trends appear to have continued. There was strong growth in the customer database, with over one million email addresses at the end of FY22 versus 767k at the end of FY21, and average selling prices were up 16% y-o-y. #4 Now partnered with M&S, John Lewis, Next and The Very Group The recent announcement of a new trading relationship with M&S supports the product’s appeal and management’s medium-term expectations of double-digit growth from digital partnerships. With the aim of ultimately offering 95 products for men and women on M&, the tie-up adds to similar partnerships with John Lewis, Next and The Very Group. Some of this contributed to H122’s strong growth of c 28% for digital partnerships. #5 We forecast growth is close at hand Our first report on Unbound estimates a compound annual growth rate of 14% for revenue between FY21 and FY24. It also foresees a strong increase in operating profit from £1.8m to £5.9m by FY24. #6 More upside is not out of the question Our forecasts exclude any additional new revenue from potential new partnerships and will remain that way until contracts are signed. But it is worth pointing out that management expects partnerships to double Unbound’s profits, over and above its stated targets for Hotter, within five years. #7 Unbound Group’s maiden trading update after its admission to AIM was reassuring As pointed out in our recent flash note, reported FY22 revenue was £51.9m, EBITDA was £5.5m and pre-exceptional PBT was not less than £0.2m. These figures were in line with expectations, as set out in our initiation note. No change to our estimates or valuation were necessary. If you would like to know more about Unbound, take a look at our research.