Cettire's House of Cards

The Cettire response to startling claims in the AFR is a masterclass in obfuscation.

Rather than address the actual allegations, Cettire instead made a series of irrelevant claims.

With regards to duty, there are two things Cettire are doing that has been called out:

(1) Where a customer purchases multiple items (which in Australia, add up to less than $1,000), Cettire legally needs to remit duty to respective Government. However, what Cettire appear to be doing (and they aren’t unique here), is send the items in DIFFERENT SHIPMENTS to trick customs into thinking the purchase is for LESS than $1,000. It is possible Cettire are remitting the cash to customs in some or all of these situations. Cettire claimed in response that it “believes that all applicable duties and other import charges are paid to the relevant authorities at the point of customs clearance. Goods are unable to clear customs unless the applicable duties are paid.” This is not an overly convincing response, but in any event, this isn’t really a major issue and we shouldn’t focus on it.

(2) When a customer purchases from Cettire, pays duty and later obtains a refund (which in Cettire’s case, happens for around a quarter of transactions), Cettire does NOT REFUND duties paid. However, when an item is returned, Cettire can claim the duty they paid back (see the Australian rules here, the US has similar rules). This is the far more concerning situation. Cettire’s announcement noted that “in Australia, Cettire has a direct debit arrangement in place with the Department of Home Affairs to facilitate direct payment of applicable duties prior to customs clearance.” While attempting to address point [1], this gave more credibility to point [2]

It also appears that Cettire doesn’t refund sales tax for US customers (which are by far its biggest customer base). [Adam note: This is actually incorrect, Cettire does not retain sales tax, I'm not fully sure if Cettire had been charging sales tax until recently, but not sure of this]

Remember, almost a quarter of Cettire’s transactions are being refunded.

Cettire’s claimed “in its H1-FY24 results, Cettire reported average order value of $791 for the Company. The duty-free threshold in Australia is $1,000. Estimated duty charges and duties payable apply to a small minority of shipments to Australia.”

In its most recent Investor Presentation, Cettire claimed that AOV for ‘returning customers’ is $890, and 58% of customers are returning. It’s likely means that over 30% of Cettire’s transactions are above the $1,000 threshold (they don’t sell much for under $300). In the US the requirement is US$800 (and remember, most of Cettire’s customers are US based). Transactions could be well above $1,000 though, so the key number is what % of Cettire’s revenue is the company charging customers duty on?

It’s highly possible that more than 50% of Cettire’s sales (by revenue, not number – the number is actually irrelevant here) are 'dutiable'.

In Australia duty is 5% of the basket size (in the US it’s 5.63%) – so let’s be very conservative again and say 5%.

So in the December half, Cettire reported sales of $354m – of which 23.1% are returned – so that’s $81m of returns. So Cettire is potentially making $4.5m a half (out of a claimed $12m net profit) from charging customers duty that is was able to clawback from various Governments.

But that’s not the only thing Cettire does that makes its profits look better.

It also capitalizes a crazy proportion of wages.

For the December half, Cettire appeared to capitalize (that is, not run through its Profit and Loss Statement) $7.3m of wages. It’s profit and loss statement only referred to $3m of wages. To be sure, many technology businesses capitalize a portion of wages – that’s usually where they have engineers or product managers building?valuable, owned technology. Even then, usually around 20% of wages are capitalized. Cettire isn’t in any way a tech business – it appears to use an off-the-shelf Shopify product, it’s about as far from a tech business as you could find. When I spoke to several IT experts, they believed that Cettire is still using Shopify’s enterprise platform (although it’s hard to confirm that with 100% confidence). If that is the case though, Cettire wouldn’t be able to capitalize ANY of its development costs (but even if it doesn’t still utilise the Shopify platform, its capitalization levels are extraordinarily high).

Finally, Cettire claimed $767,000 in R&D incentives (which is dubious as noted, given the business ain’t a tech company any more than McDonalds is).

So adding it up, that’s almost ALL of it’s claimed December profits being questionable.

Even after the recent fall, Cettire is still ‘valued’ by speculators at $1.52 billion. That’s about $1.52 billion too much.