For retail businesses booming during the pandemic, an IPO seemed like the natural next step. Yet for many of the 2020 winners share prices have plummeted – Retail Week asks why. 

  • Many retail businesses that experienced a boost in revenues over the pandemic opted for a stock market flotation.
  • External challenges, as well as speculation around overvaluation for these companies, have led to share price declines.
  • Retailers planning a flotation in the future should “take stock, have a breather, try and get your ducks in a row again and look to perform well against these headwinds”, according to one industry source.

From In The Style and Dr Martens to Moonpig and Virgin Wines, a series of retailers launched IPOs in rapid succession over the past year.

Companies such as Boohoo and AO that had listed long before swathes of shoppers moved online also saw their stock price and valuations benefit. 

In January, HSBC head of retail James Sawley outlined to Retail Week why a stock market flotation was so compelling for these retail players: “The pandemic has accelerated consumer trends such as the growth in direct to consumer, convenience and personalisation, and companies in this space are looking to the public markets as they have a great story to tell investors.”  

“The pandemic has accelerated consumer trends such as the growth in direct to consumer, convenience and personalisation, and companies in this space are looking to the public markets as they have a great story to tell investors”  

James Sawley, HSBC

However, as 2021 draws to a close, some of these pandemic stock market sweethearts are finding the sheen has worn off.

While a tumultuous set of external factors have not meant a complete reversal in fortunes for those that entered the ring last year, ongoing challenges have led to a fall in share price growth for many.

Overvalued and under-delivering?

As one analyst put it to Retail Week, the increased levels of customer demand that propelled these companies to float last year remains, but a perfect storm of supply chain challenges, labour gaps and fuel shortages are impacting their abilities to now meet that demand. 

Rising inflation is also causing concern for stocks. As inflation rises, its impacts – including higher borrowing costs, increased labour costs and rising prices for consumers – result in reduced earning expectations and dropping share prices. 

In The Style is among those grappling with higher freight costs and supply issues. Shares dipped by 10% for the fashion retailer after it issued a profit warning last month, while Made.com shares also fell 40p from its June IPO price following supply chain disruptions.

It’s not only recently listed retail businesses that have been affected by external headwinds. AO.com saw more than £200m wiped off its stock market value earlier this month after it blamed “challenging market dynamics” across the UK and Germany for constricted sales growth and declining profits.

Some of these recently listed retail businesses were simply overvalued by the City when they floated. One industry source says the market got ahead of itself in abnormal trading conditions. 

MADE.COM_s-London-flagship-showroom-has-just-reopened-with-a-new-look-(Image-courtesy-of-MADE.COM)

Made.com saw its share price tumble following supply chain disruption

However, the source says it’s understandable that many companies opted for a Covid IPO: “Why wouldn’t you try? It looks advantageous from the outside to take your proposition to market when you are having a cracking time and you can get a valuation off the back of that performance – whether or not that trajectory is realistic or not.”

No company has been so negatively impacted by overvaluation speculation in the UK as The Hut Group. The retailer responded to dropping share prices with a capital markets day that was blasted “disastrous” and wiped a further £1.9bn off the market value.

Queries around the company’s business model and the viability of its Ingenuity platform – which offers logistics and ecommerce services to other brands – also raised investor concerns.

Chief executive Matt Moulding’s decision to cancel his controlling ‘golden’ share to promote “good corporate governance” earlier this week has stemmed the bleeding, with the company’s shares rising 8.7% following the announcement. 

“Why wouldn’t you try? It looks advantageous from the outside to take your proposition to market when you are having a cracking time and you can get a valuation off the back of that performance”

Industry source

Despite this, THG is currently valued at £4.2bn, less than half the level recorded in early September last year.

According to Statista, 87% of households started to make online purchases in 2020, making this the highest online purchase penetration rate in the UK in the past 11 years.

However, in September of this year, online non-food sales decreased by 7.3% across the month against a growth of 37% in the same month last year, according to the latest BRC-KPMG Retail Sales Monitor. 

As sales have petered off from their Covid peak and physical retail has reopened, some investors are beginning to question the longer-term profitability of these pureplay and digitally led brands. 

This has created a perfect storm – with overvalued retailers being punished for failing to meet unrealistic investor expectations due to tough year-on-year sales comparables.

Watch and wait

In the long term, share prices are set to level out to a more realistic outlook as the market finds a balance between the highs of the pandemic and the more tempered expectations of the present. 

“It’s a revaluation phase, there’s nothing structurally incorrect about these companies,” the industry source explains.

Despite this, more players are now taking stock of the ongoing situation and making decisions around their own listing. While kitchenware retailer ProCook is considering a £250m to £300m float, online marketplace Fruugo has parked plans for a stock market listing for the moment. 

BrewDog has also hit pause on a potential flotation until 2022 or 2023, following advice amid uncertain times for the hospitality industry.

Brewdog Aberdeen

BrewDog has decided to wait until at least 2022 to consider floating

“There’s too much uncertainty, you’re not going to get the valuation you want,” concluded the industry source. 

His advice to retailers pondering taking the plunge was simple: “You’re going to take stock, have a breather, try and get your ducks in a row again and look to perform well against these headwinds.”

The allure of the IPO will remain in the coming months, with Gymshark also revealing its intentions to float next year.

However, for those that floated during the pandemic, share price declines can be attributed to overvaluation, following inflated sales over an unusual period. Ongoing volatile trading conditions have also added to the dip in company valuations.

As the market recalibrates to align with consumer habits adapting to the ’new normal’ and external challenges resolved, analysts are confident share prices will follow suit.