Earnings call transcript: THG posts stronger H1 2026 results as shares fall

THG reported H1 2026 revenue of GBP 828.7 million, up 7.2% year over year, while adjusted EBITDA more than doubled to GBP 42.8 million and LTM EBITDA reached GBP 95.4 million. The group reaffirmed expectations for GBP 25 million-GBP 35 million of positive full-year free cash flow, with Q3 constant-currency sales growth expected at roughly 2% before accelerating to 6%-7% in Q4. Despite the improved turnaround metrics, shares fell 6.85% to $29.53 as investors remain concerned about EU duties, U.S. manufacturing supply disruptions, durability of earnings conversion, and uncertainty around non-core asset sales and the HMRC VAT claim.

Analysis

THG’s valuation debate now shifts from restructuring credibility to the durability and quality of cash conversion. The key near-term issue is that the expected second-half acceleration relies on delayed U.S. manufacturing dispatches, seasonal working-capital release and improved product phasing—three sources of cash that investors may reasonably discount until reported. A sustained rerating requires evidence that underlying gross margin expands despite promotional intensity and cross-border duty friction, rather than EBITDA growth being principally a residual benefit of cost removal.

The most investable second-order exposure is whey input deflation. If dairy supply normalization develops, THG Nutrition has operating leverage because its value-tier product strategy can retain part of the cost benefit while protecting volumes; branded peers with heavier wholesale exposure, including BellRing Brands (BRBR), may face more rapid retailer pass-through. Conversely, renewed whey inflation would test whether Myprotein’s unit growth is economically attractive: volume growth without gross-margin disclosure should not be assumed to be value accretive.

The market’s selloff may reflect a more rational concern than simply skepticism toward a turnaround: management’s medium-term deleveraging case contains optional items—asset monetization and a VAT outcome—while its reported profit metric is adjusted EBITDA. The contrarian opportunity is that a simple two-division structure, reduced fixed costs and refinancing can cause equity value to inflect sharply once positive free cash flow is demonstrated for two consecutive periods. But the Google/AI pilots are presently customer-experience experiments, not a basis for assigning a technology multiple to THG or a material earnings catalyst for GOOG.

Over the next 1-3 months, Q3 trading and the October tax decision are the relevant proof points; over 6-18 months, the test is whether Nutrition reaches its stated margin framework while Beauty manufacturing clears delayed orders without requiring discounting. Thesis failure would be a miss to full-year free-cash-flow delivery, another downgrade to Q4 growth, or evidence that inventory/receivables—not operating profit—are driving cash generation.

Key Decisions for Investors

• Keep THG on a long watchlist rather than chase the initial drawdown. Initiate only after Q3 confirms stable underlying growth and management reiterates positive free-cash-flow guidance; target a 6-12 month rerating on two clean cash-generative reporting periods, with a stop if full-year FCF guidance is cut or gross margin contracts.
• For a higher-risk event position, buy a small THG tranche ahead of the late-October HMRC update only if implied VAT proceeds are not already embedded in sell-side target values. Treat any tax outcome as upside optionality, not core valuation; size for a binary adverse/delayed ruling and exit if the decision is deferred again.
• Monitor a relative-value setup: long THG / short BRBR if whey benchmarks decline for 6-8 consecutive weeks and THG shows gross-margin retention in its next update. The thesis is greater THG margin recapture from direct-to-consumer pricing; close if whey rebounds materially or THG uses the benefit to fund elevated promotions.
• Do not establish a GOOG position on the announced beauty initiatives. Revisit only when Google discloses monetization, transaction volume, or a broader commerce-product rollout; current linkage is immaterial to Alphabet earnings.