This Australian retailer is either Victoria Beckham’s fashion victim or a mess

The company delivered on its story of skyrocketing – and profitable – growth as consumers who were wealthy during the pandemic became increasingly comfortable buying luxury fashion online.

But the Cinderella story contrasted sharply with failed rivals like FarFetch, in a sector struggling on thin profit margins.

The success story came under considerable pressure at the beginning of this year when doubts arose about the way in which Cettire actually made money.

Duty arbitrage has been cited as the culprit for its success. By selling online – and mainly outside the European Union – Cettire can exploit loopholes in trade rules that would otherwise require it to pay VAT in the EU, or import duties on goods delivered to the US, which is its biggest source of revenue.

But controversy has erupted over reported discrepancies in the import duties the company charged customers and how much was actually paid to authorities, especially in the US, its largest market.

Did Cettire make money by charging customers import duties that they then pocket?

In its response to the allegations, Cettire said: “All applicable duties and other import charges are paid to the relevant authorities at the time of customs clearance.” The company denied overcharging customers.

But Cettire made an important change: it no longer made a distinction in the fees it charged customers for import duties.

A shock downgrade in June, which halved Cettire’s share price, confirmed that the retailer was no longer defying gravity in a market awash with discounts from the group’s competitors on one hand, and weakening consumer demand on the other.

It didn’t help that this coincided with an audit of import duty payments, raising doubts about who was to blame.

Then came last month’s financial results.

Shares fell to multi-year lows after it failed to audit its financial statements due to revenue recognition issues. It made little money in the June quarter and expectations were that conditions would remain tough in the current quarter.

Shares that were worth $4.90 in February fell to a low of $1.01 within days. The difficult market conditions are expected to continue this financial year.

Reclusive founder and CEO Dean Mintz wants investors to believe that the company’s worst financial crime is that of victims in fashion. Luxury brands like Acne Studio and Victoria Beckham offer discounts directly to customers, with the latter offering discounts of up to 60 percent.

“One of the really unusual things we saw in spring/summer 2024 was brands doing deep discounts themselves on their own websites,” Mintz told analysts and investors on the group’s conference call.

But he expected the brutal end to the spring/summer sales season to give way to a more sober winter, an indication that this is temporary and that Cettire will return to its normal course with a balance of significant profitable growth.

But as nervous investors know, the truth can be much worse. Let’s go back to the unaudited accounts.

Cettire said last month that its audit was “progressing”, with accounting firm Grant Thornton investigating whether the company should be recognising all the money it receives from customers as revenue. The argument is that it acts as an agent for the fashion distributors – who do the physical handling of sales – and that Cettire should not be taking their share of the proceeds.

According to the bank, this would mean that reported sales would decline, but there are no other key financial indicators.

“It would have no impact on reported earnings or cash flows, nor would it change the legal basis for the Group’s contractual relationships with suppliers and customers,” Cettire said.

This raises the obvious question: if it makes no substantive difference, why is the audit being postponed at this point?

Cettire gave no explanation, but others did.

Critics like the blogger known as Tax losshave speculated that this could mean Cettire will have to provide more detail in its financial reports, such as how much money the company generates from product returns and, more importantly, import duties.

This would clarify whether Cettire is dependent on arbitration over rights and refunds of fees for its profits, as short sellers and other critics allege.

Cettire certainly did nothing to clarify the issue when RBC analyst Wei-Weng Chen attempted to address the “elephant in the room” and asked Cettire directly about the duties issue during the earnings conference call.

His question was simple: did Cettire automatically pass on to the competent authorities all the import duties it charged its customers?

Tim Hume, Cettire’s Chief Financial Officer, distinguished between charges such as GST and VAT, where there is an obligation to remit the money raised to the relevant authorities.

“Duty is a little different by nature,” he replied.

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It was a day of celebration for the short sellers who profit from every drop in a company’s stock price. They were well prepared for a disastrous financial outcome, as about 10 percent of Cettire’s shares were sold short in the run-up to the announcement.

To give you an idea of ​​how enraged this has made Cettire’s management, the retailer reported in its accounting records that it had spent more than $900,000 in “short campaign expenses” in just a few months to combat the short sellers.

While the effectiveness of this campaign is questionable, Mintz played his own trump card when stocks threatened to fall below $1.

Mintz, who quickly made more than $330 million out of the company by selling stock — as recently as February of this year he sold $172 million worth of stock at $4.63 — began buying shares.

In the end, he only spent $15.8 million, but the stock price skyrocketed when he paid a whopping $1.66 per share for it.

It was a classic short squeeze. All short sellers would have been forced to buy the rising stock to cover their positions or risk losing money on the trade thanks to the rise in the stock price.

It may keep Cettire’s shares buoyant in the short term, but it will do little to convince sceptics such as Ron Shamgar, head of Australian Equity Strategies at TAMIM, who sees plenty of red flags in the business model, auditor issues and large-scale insider selling.

He has no financial interest in Cettire, but he posted a tweet last week putting Cettire in the same boat as stock market failures like Big Un and iSignthis.

“My gut feeling is that Cettire $CTT will eventually go to zero,” he tweeted. “My prediction is that ASX will suspend share prices in the next 12 months or much sooner.”

LHC Capital, a former fan of Cettire, also saw Mintz’s recent sale as a warning sign and sold all of its shares for huge profits before signs of trouble sent the stock plummeting.

“It’s hard to see this as anything other than a warning sign,” LHC said in April of Mintz’s March share sale, which quickly led to the company’s divestment from the stock.

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