The Afterpay Touch Group Ltd (ASX: APT) share price is up 13% in early trade on Thursday after announcing a business update to the market.
What Afterpay reported
Australia: The buy now, pay later business reported that its Australian and New Zealand operations continues to go well with 'strong' underlying sales performance and customer growth year-to-date in FY19.
A number of large retailers continue to integrate onto the Afterpay platform including EB Games, ASOS Australia, Boohoo, Tommy Hilfiger, Sussan, Kogan.Com Ltd (ASX: KGN), Village Roadshow Ltd (ASX: VRL), Lovisa Holdings Ltd (ASX: LOV) and Kmart, which is operated by Wesfarmers Ltd (ASX: WES).
Afterpay is also working on expanding its in-store offerings. Recent wins include: Target, Harris Scarfe, Best & Less, Angus & Coote, Prouds the Jewellers and Bonds.
The millennial-focused company has also been working on expanding into the healthcare industry. So for it has agreements with Primary Dental, Maven Dental, Pacific Smiles Group Ltd (ASX: PSQ) and Totally Smiles. In optometry it has agreements with OPSM, Bailey Nelson and Optical Co.
It has over 2.5 million active customers, excluding US customers, and 90% of monthly underlying sales are repeat customers. Net transaction losses are within its target range and broadly in-line with the FY18 performance of less than 0.5% of underlying sales.
Afterpay dedicated some of the announcement to defending its model in the update, essentially saying that it is fundamentally different to all other providers in Australia that revolve around charging interest and account fees.
USA: Over 300,000 consumers and over 900 retailers have transacted with Afterpay in the US, leading to over $115 million of underlying sales year to date.
Management also said that there are a further 1,300 retailers that have signed agreements or are in the process of integrating onto the platform. Afterpay said that the total addressable market of retailers who are live in the US is now bigger than the total online apparel market in Australia. Of course, it has a much smaller percentage of those sales at the moment.
I thought this was a solid update. Indeed, Afterpay said it has achieved more growth in six months in the US than what it achieved after two years in Australia. It helps that it now has a recognisable brand and offering.
Some of the early adopters of Afterpay in the US include Urban Outfitters and Skechers.
However, at the moment net transaction losses are currently higher than the Australian business in the initial stages. But, the company said it's within budget and losses should reduce similar to the Australia business percentage as economies of scale and global supplier arrangements come into greater effect over time.
Afterpay said it continues to target an FY19 earnings before interest, tax, depreciation and amortisation (EBITDA) loss in the US of around $20 million, pre-accounting changes and foreign exchange impacts.
UK: The UK expansion is progressing according to plan and is expected to require a smaller loss than the US to get going, perhaps as much as a half.
Is Afterpay a buy?
It's truly remarkable how Afterpay has taken the Australian retail market by storm and is now expanding into healthcare as well as going well in the US in the initial stages. Afterpay management seem to think that anything that can be split into instalments should be targeted.
I do agree that Afterpay is different to its competitors, it has also strengthened its identity & security checks recently. However, that may not be enough to completely save it from regulation. But, its competitors may be affected far more, making Afterpay a net winner from whatever happens.
Whilst I personally won't be buying Afterpay shares, the pull-back has made it a lot more attractive. However, it's still priced for large success in the US and the UK. You would need to be invested for the long-term for it to work out well at this price of 69x FY20's estimated earnings.
