Unbound Group — A platform for growth

Unbound Group is seeking to build on the strong foundation of its core trading business, Hotter Shoes, to sell a broader range of products to its target demographic, people aged 55+, which has a favourable growth and wealth profile. Hotter specialises in the design and manufacture of comfort footwear. Management’s strategy is to continue growing Hotter Shoes as a digitally led, direct-to-consumer (DTC) footwear brand in the UK, US and Europe aimed at its core demographic. It plans to leverage the growing customer database (currently 4.6 million customers) by offering a range of new and complementary products through the curated ‘Unbound’ digital marketplace. Management’s aspiration is for non-Hotter products to represent c 50% of Unbound’s profit by FY27, ie suggesting a doubling of profit in addition to the stated medium-term guidance.

Our estimates point to a revenue CAGR of 14% in FY21–24e, and a strong increase in operating profit from £1.8m in FY22 to £5.9m in FY24. Extrapolating management’s medium-term guidance beyond FY24 would imply FY22–25e CAGRs for revenue and operating profit of 11% and 72% respectively. Our forecasts exclude any potential revenue from the Unbound marketplace until the partnerships are signed. Management expects these have the potential to further double profits, over and above its stated targets for Hotter, within five years. With management expectations of first-time revenue from the new partnerships in Q2 of CY22, news flow with respect to the partnerships is likely to gather pace in the coming months. Management anticipates consistent conversion of EBITDA to operating cash, and reducing fixed asset intensity will help to reduce financial gearing, with a target for net debt of below 2x maintainable EBITDA in the short term, and a net cash position in the medium term without future strategic spend, eg M&A. There are unlikely to be dividend distributions to shareholders in the medium term.

Our DCF-based valuation, which similarly excludes any new revenues from the Unbound marketplace, suggests a share price of £70m or 165p per share. Upside to the share price is supported by lower multiples versus the median for other UK online and small-cap peers despite our higher projected estimates for revenue growth and profitability for the core Hotter business. We recognise that the valuation is prior to any potential discount given the limited public track record, smaller market value and liquidity, and the as yet unproven non-Hotter growth strategy.

Unbound’s key sensitivities include:

Unbound Group is the parent company for a group that intends to sell a range of brands to a target customer base of people aged over 55 years, building on the foundation of its current trading business, Hotter Shoes. Hotter Shoes, the trading name of Beaconsfield Footwear, was Electra Private Equity’s (ELTA) sole remaining corporate investment, prior to it ceasing to exist as an investment trust, and relisting as Unbound Group on AIM on 1 February 2022.

Hotter specialises in the design and manufacture of comfort footwear and is renowned for its product quality, customer service and innovation, epitomised by its pioneering use of comfort technology.

The company’s vision is to ‘help people move better, feel better and do more of what they love’. Therefore, management’s strategy is to continue growing Hotter Shoes as a digitally led DTC comfort footwear brand in the UK, United States and Europe. In addition, it seeks incremental growth by working with partners to sell new and complementary products and brands through the curated ‘Unbound’ digital marketplace to its core demographic. The target demographic is the wealthiest, has the highest level of disposable income, and is expected to be the fastest growing of any age group as the population ages (source: Office for National Statistics), leading to strong growth potential in Hotter’s addressable market.

Management’s financial guidance for Hotter alone (see Financials section) implies strong growth for revenue and a significant increase in profitability as it leverages its fixed cost based. In addition, management aspires for non-Hotter products to represent 25% of Unbound’s profit in three years, and 50% within five years, suggesting a doubling of estimates from current guidance and versus our estimates, if the strategy proves successful.

Established in 1959 by the Houlgrave family and still based in Skelmersdale, Lancashire, Hotter Shoes is Britain’s largest shoe manufacturer, with capacity to make 1.3m units pa. The company’s trading name was rebranded to Hotter in 1996. In January 2014, ELTA invested £84m in the management buyout of Hotter from the company’s founder and Gresham LLP. A further £1m was paid in July 2017 for a 1% interest taking the total investment to £85m. Following the opening of the first store in 2002, there was a rapid expansion of the UK store base, increasing from 10 to 109 stores from 2010 to 2016. At the time of acquisition by ELTA, Hotter had more than doubled its revenue in the prior four years driven by the favourable demographic changes of its core target customer, as well as international growth opportunities in the United States and South Africa. The strategy was to continue building the business via more store openings in the UK, further growth in international markets, growing online sales, and developing and extending the product range to broaden its target market.

From 2016 to 2018, a combination of internal operational challenges, a loss of focus on the brand’s core demographic (ie lack of product vision and brand development), difficult trading conditions in key markets, greater discounting and increased costs, such as rent, took their toll on Hotter’s profitability. Hotter’s revenue peaked at £101.3m in FY16 (year-ended January) and declined to £93.0m in FY19. When coupled with a high level of fixed costs, Hotter was loss making overall but profitable at the EBITDA level, and operating cash flow was negative.

In 2019, the present CEO, Ian Watson was appointed and there followed changes across the majority of the senior management team, all with sector-specific and implementation/turnaround skills. From a retail-focused single brand footwear business serving mainly women aged over 55 years, the strategy was, and remains, to focus more on DTC serving both men and women with an own brand product offering. This required the company to regain its focus on the core demographic, better differentiate its product, develop the DTC digital channel, improve Hotter’s cost to serve and reduce the seasonality of the business.

With respect to regaining focus on the core demographic and improving product differentiation, the company hired a new chief product officer (from Hobbs and prior to that Phase 8 and the White Company) and returned to its traditional focus on ‘comfort’ and ‘fit’. It invested in technology such as 3D foot scanning and further expanded its range of ‘comfort’ technologies.

In order to focus on DTC, the store portfolio was significantly rationalised, ultimately leading to a Company Voluntary Arrangement (CVA) in July 2020. The CVA led to the closure of 58 unprofitable/low profitability stores, leaving 17 stores and six concessions in garden centres. In addition the company increased its investment in IT systems and infrastructure to enhance its digital capabilities and the customer experience. The technology and systems investment focused on customer relationship management (CRM), business information, enterprise resource planning (ERP), and upgrading the e-commerce platform.

The product range is continuously refreshed through 10 monthly (excluding December and January) product ‘drops’ within two key seasons, which should produce an improved gross margin through lower terminal stock and therefore not be required to be discounted.

The timeline of the Hotter’s transformation to a digitally led business is highlighted below.

We discuss Hotter’s financials in more detail later but, as a result of the transformation to date, in H122 and beyond, revenue has grown strongly from most channels, fixed costs have been halved leading to all channels being profitable at the EBITDA level according to management, and the company generated positive operating cash flow.

Hotter specialises in the design and manufacture of stylish comfort footwear with a target market of people aged over 55 years. It manufactures over 1m pairs of shoes per year, with capacity for 1.3m pairs, making it the UK’s largest shoe manufacturer. It is renowned for its product quality, customer service and innovation, including a number of proprietary or specialist ‘Comfort Tech’ options, all of which are supportive of Hotter’s premium price proposition:

The Freesole, Cushion+, and Stability+ product ranges were launched in October 2020 as the company’s new operating model was implemented and their representation in the range has increased significantly.

In order to ensure customers get the best fitting footwear, and to differentiate its retail experience, Hotter has invested in ‘Footprint’ across its store estate including the garden centre concessions. Footprint is a 3D foot scanning technology that provides exact foot measurements enabling the customisation of product recommendations. Hotter also benefits from the collection of customer data including email addresses (for future marketing opportunities) and specific knowledge of the customer’s fitting requirements. Hotter also has other technologies in store that enable staff to present the available comfort tech options in an interactive way, helping to better inform the customer’s buying decision.

In December 2021, Hotter’s website included non-discounted ranges of 76 styles of footwear (boots, shoes and slippers) for women, and 18 styles for men, with a number of colour options available for each style. The comfort technology options in each product are easy to identify on the website. For women, the price ranges were slippers (£49–75), shoes (£34–109) and boots (£89–149), and for men were slippers (£59–75), shoes (£99–139) and boots (£105–129). In addition, there were 49 styles in the ‘Outlet’ section of the website discounted to prices of £25–75. Its price architecture and positioning of women’s footwear versus its competitors is as follows:

Hotter’s target market has historically been women aged over 55 with specific fit and comfort needs in footwear, and the company now offers a smaller selection of footwear to men.

The many growth initiatives that Unbound is pursuing are summarised in Exhibit 3 below.

While its focus demographic has a favourable growth outlook (see below) and will continue to be an important target with further range extensions expected, the company aims to broaden the proposition significantly by working with partners and other brands to sell a range of products in other categories, notably active lifestyle, wellbeing and health, that should appeal to the entire 55+ demographic. In return, management hopes to offer Hotter’s products on the partners’ websites. We note that the gross margin of wholesale served from the UK was lower (31.8% in H122) versus the group average (61.6%), but there are likely to be lower operating costs associated with this revenue.

The business model for the partnerships is expected to be commission based on revenues and the medium-term ambition is non-Hotter products will represent 25% of profit in three years (2024) and 50% in five years (2026). Management believes the partnerships will be EBITDA and cash generative from the outset, but with reinvestment in growth in the short term.

Initially, the company is focusing on developing brand partnerships in footwear, apparel and wellness. Unbound has collected data of purchase behaviour and demographics from its distribution channels, ongoing feedback from its customer database and ongoing concept testing. Management has identified initial target brand partners and commercial negotiations are in progress with multiple parties, with the expectation that new revenues will be generated in the second quarter of CY22. At around the same time, Unbound will seek to develop new brand partnerships in adjacent markets/categories, with no stated timetable for the expected generation of the new revenue streams. Thereafter, management expects to begin developing own branded products in the same categories, which should be supportive for gross margins on a relative basis.

The over-arching criteria for new partners and brands is they must: be relevant to the company’s core demographic; be aspirational or desirable, enhance Unbound’s brand; have expertise or specialism in the category; and have strong environmental and sustainability credentials.

Unbound’s growth outlook is supported by favourable structural drivers that management expects will continue to drive increasing penetration of online revenues from its core demographic in its categories of focus, summarised as follows:

The chart below shows how Unbound’s core target demographic, aged over 55 years, is expected to demonstrate the most significant growth in population of any age group in the coming years.

From a UK population of 67.2 million in 2020, 20.9 million or 31% of the population were aged 55 years or over. The Office for National Statistics forecasts that by 2050 the number of people aged over 55 years will be 27.2 million or 37% of the total population of 73.6 million people. Over this period, the total population is expected to grow by c 10%, but those aged over 55 years will grow by a more significant c 30%. Within the 55+ age range, the greatest growth will be among those aged over 75 years (79% growth from 5.8 million in 2020 to 10.4 million in 2050), followed by 65–74 years (c 16% growth from 6.7 million to 7.8 million) and 55–64 years (c 7% growth from 8.4 million to 8.9 million).

Beyond, the long-term structural drivers mentioned above, with respect to Hotter’s current market exposure, the UK women’s footwear segment is forecast to grow from £3.1bn in 2020 to £3.9bn in 2024, a CAGR of 5.9% (source: Admission Document).

Hotter’s sales are primarily through its own DTC channels with a full proposition across digital and mobile, and it also has a physical retail exposure, albeit much reduced following the CVA. From a geographic perspective, the majority (93%) of Hotter’s H122 sales were in the UK, c 7% of sales (in H122) were in the United States, and there is some minor unspecified revenue outside the UK and United States. The following chart shows the development of Hotter’s revenue split since the arrival of the new management team, including the effects of the retail stores closed during the CVA.

Management’s focus on developing DTC and the other changes to the customer proposition have led to DTC’s importance to the group increasing over this time. Hotter’s UK DTC (online and offline) revenue has increased from 64% (£12.8m) of Hotter’s H121 revenue (£20m) to 71% (£17.8m) of the total (£25m) in H122. The online versus offline classification of DTC revenue simply refers to how the customer’s order is received: online is a ‘pure’ digital sale via the company’s website, app or in response to its email campaigns, while offline refers to sales received via the company’s call centre.

The increasing importance of DTC and the move to more monthly supply drops should be supportive for gross margin given the ability to flex pricing quicker and require lower stock commitment that should help to reduce markdown risk.

The growth of DTC revenue has been by driven by steady growth in Hotter’s customer database to 4.6m at the end of August 2021, improved marketing to and conversion of those customers to a sale, and the general company-wide benefits from the return to Hotter’s ‘roots’ and subsequent new product development. Management estimates c 29% of the total UK 55+ female population is registered in its customer database.

Below we show how the numbers of both ‘email’ and ‘analogue’ customers have increased since 2018. The growth has been fuelled by the company’s cultural shift to focus on digital; enhanced data capture including when customers are in store; and the relaunch of the company’s app in February 2021. Management believes the improved functionality of the new app, including an augmented reality ‘try on’ functionality, has been significant in helping to grow downloads of the app, reaching 70k downloads by August 2021 from 24k on relaunch in February. In turn, these new customers are proving to be more productive, with a conversion rate to revenue that is twice that of new customers from other sources. Management will continue to invest in the functionality of the app, including plans to offer foot sizing.

‘Email’ customers are, by definition, those for whom Hotter has their email contact details and are relatively easy to market to. ‘Analogue’ customers are those for whom it has names, addresses and telephone numbers etc.

We cannot attest to the ‘quality’ of the analogue customer database, specifically how up to date customers’ details are given likely changes since initially collecting the details, due to potential changes of address and deaths, etc. However, it is encouraging that the number of analogue customers increased at a CAGR of c 4% from 2018 to 2021, and the number of email customers has grown at a greater rate, a CAGR of 6% from 2018 to 2021, with an apparent acceleration through FY22, reaching more than one million customers by the end of October 2021. The growth is testimony to the company’s enhanced marketing/CRM capabilities against a backdrop of Hotter having fewer physical stores over this period.

The newly disclosed KPIs for DTC UK show a relatively consistent improvement for most: online visits, order volumes and gross order value.

The increase in online visits and conversion were attributed to more efficient direct marketing and a better user experience on the website. H122’s gross order value returned to pre-COVID levels of £66, following a high level of discounting in FY21 (across all channels) to clear excess stock.

As already highlighted, since the arrival of Ian Watson as CEO in 2019, the store base has been rationalised so that Hotter currently has a presence in 17 key standalone town/city locations including Aberdeen, Cambridge, Cardiff, Exeter, Norwich and York as well as seven garden centres, which gives nationwide coverage. During the CVA in July 2020, Hotter closed 58 locations and was left with 17 profitable standalone stores. The stores or ‘technology centres’ are important for new customer recruitment and also the offer of the important Footprint 3D technology, which scans customers’ feet. In FY20, the closed stores generated £25m revenue, or c 29% of Hotter’s total reported revenue of £85.5m.

Wholesale served from the UK includes digital partnerships, which refers to the offer of selected ranges via other retailers such as Amazon (UK, EU and US), Debenhams (relaunched July 2021), John Lewis (October 2021), Next, Very and Zalando (October 2021), as well as its traditional wholesale revenue, ie sales to independent retailers. These help to increase the company’s distribution, and further limit the need for its own store infrastructure. The growth of sales through digital partnerships of 28% y-o-y in H122 is testimony to the attractiveness of the brand to other partners. With respect to other wholesale, the growth outlook for this revenue is dependent on the health of the high street and the attractiveness of the independent retailer to Hotter and vice versa.

Based in one location in Skelmersdale, Lancashire, Hotter is a vertically integrated manufacturer and retailer. It manufactures c 80% of its products in the UK, with shoe uppers sourced from India, and the remainder is sourced as completed products from China, India, Portugal and Vietnam. In addition to the direct sourcing of completed products from overseas, Hotter also sources other inputs and work-in-progress from overseas markets. Therefore, in aggregate c 90% of inputs are sourced outside the UK. Management is currently in the process of exploring additional European suppliers, and placed a strategic focus on the manufacturing process to increase efficiency and reduce wastage and labour time.

We believe the existing infrastructure can support a significant of level of growth given prior to the recent investment in technology and closure of a good proportion of the retail estate. The infrastructure previously supported a revenue base of over £100m in 2017 versus FY21’s £44.5m.

In the 2 November 2021 trading update, management pointed to a reduction in the supply chain disruption due to COVID-19 related lockdowns in India and Vietnam that it had experienced in August and September. Naturally, Hotter is also experiencing higher incoming freight costs, notably air freight, and therefore management is looking to re-introduce sea freight as a more cost effective and environmentally friendly option. Notwithstanding this increased cost pressure, management indicated that costs are in line with those expected for its medium-term guidance.

Neil Johnson – non-executive chairman: Neil became executive chairman of ELTA in March 2018 after joining as a non-executive chairman and director in May 2016. Currently he is also a chairman of QinetiQ Group and senor independent director of the Business Growth Fund.

Ian Watson – chief executive officer: Ian was appointed as CEO of Hotter Shoes in March 2019 and has been responsible for the development of the strategy. Prior to joining Hotter, he was CEO of Start-Rite Shoes, European MD at Britax Childcare and a senior vice president at Newell Brands.

Daniel Lampard – chief financial officer: Dan joined Hotter as CFO in August 2021. His prior roles include CFO of D2C Glanbia Performance Nutrition, FD at AO World Group, and Manchester Airport Group.

We see the main sensitivities as follows:

At the capital markets day (CMD) in September 2021, management provided medium-term guidance and reiterated the guidance in the Admission Document (January 2022) on how it expects Hotter’s and Unbound’s financials to evolve in the medium term. Although there is no stated timeframe for the ‘medium term’, the fact that some constituents (see below) specify FY23, we assume ‘medium term’ refers to FY24 onwards.

With respect to Hotter, the guidance is summarised as follows:

We believe the broad underlying assumptions for the guidance are improved marketing to increase brand awareness, which will continue to drive growth in the number of customers, as well as product improvements and range extensions.

The medium-term guidance for the Unbound partnership model is:

Our forecasts, which are in line with management’s guidance excluding any potential upside from new digital partnerships, are show below. We exclude revenue from any new digital partnerships for the time being as the company has yet to sign any agreements with partners.

We forecast revenue to grow by c 17% to £52.0m in FY22, and by a further c 14% in FY23 and c 10% in FY24 to £65.1m. We note that Beaconsfield Footwear’s revenue peaked at £101.3m in FY16, therefore we believe the existing infrastructure has sufficient capacity to meet our revenue growth projections.

In aggregate, our revenue CAGR in FY21–24e is c 14%, and if we extend management’s medium-term guidance through FY25 the revenue CAGR in FY22–25e would be c 11%.

Revenue declined through FY21 due to the CVA and the negative effects of COVID. H122’s results to July 2021 and subsequent trading updates (to October 2021 and December 2021) indicate that the reshaping of Hotter as a largely DTC business is producing impressive results. In H122, Hotter’s continuing revenue (excluding revenue from closed retail sites) increased by 25% to £25m, and if we exclude the revenue from closed retail sites, the growth rate was a more impressive 34%. The strong recovery in sales led to a more significant increase in gross profit to £15.4m (H121: £10.1m), a notable increase in gross margin to 61.6% from 50.7%. Absolute year-on-year reductions in fixed costs and reductions in variable costs (relative to revenue) helped to take Hotter back to profitability.

In the trading update of 2 November 2021, ELTA reported Hotter’s revenue for the last 12 months (to end October 2021) of £50.4m with continued growth in DTC and recovery in retail. In addition, gross margins and costs during the period were consistent with those envisaged in the medium-term guidance provided at the CMD. As previously highlighted, revenue growth was driven by strong growth in the number of DTC customers and profitability has been managed despite supply disruption and freight costs. In a further trading update on 2 December 2021, Q3 sales were reported to have grown by 9% and gross margin improved to 65.8%from 56.2% in the comparative period. Trading in the key Black Friday period grew by more than 10% compared to the same period last year.

Our estimate of a gross margin of 63.5% in FY22 and 64.5% in FY23 compares with management’s guidance of approximately two percentage points above pre-COVID levels (62.5%) from FY23.

We forecast a strong increase in Unbound’s operating profit to £1.8m (margin of 3.5%) in FY22, implying an H222 margin of 4.8% and an increase to £5.9m (margin of 9.0%) by FY24. If we extend management’s medium-term guidance to a mid-teens operating margin by FY24, the CAGR for EBIT in FY22–25e would be c 72%. The higher operating margin is expected from leveraging the fixed cost base, which represented c 30% of sales in FY21 (source: CMD presentation, September 2021).

Unbound is unlikely to pay corporation tax for a couple of years as it has a tax asset of accumulated losses brought forward of c £8m.

The improvement in Hotter’s profitability, along with lower working capital intensity (improved stock management and improved payment terms secured with suppliers in H122) and lower cash tax payments, has translated into a significant improvement in cash flow.

We forecast an improvement in Unbound’s cash generation and financial position, mainly due to expectations of higher profitability. In the medium term, management guides for operating cash generation to be in line with EBITDA, with no significant change in its working capital intensity. We assume consistent inventory (relative to cost of goods sold), debtor (relative to sales) and creditor (relative to total costs) days in our forecasts.

Annual capex (tangible and intangibles) of £2.5m is expected, with no material one-off spend required in the medium term.

At the end of H122, Hotter had a net debt position pre-IFRS 16 liabilities of £16.4m, with gross debt of £19.8m and gross cash of £3.4m. Subsequent to the H1 balance sheet date, ELTA has injected £5m of equity which was used to pay down debt at the same time the debt was refinanced, and a number of assets have been transferred across from ELTA to Unbound, including c 2m shares in Hostmore, which management expects to realise and cash of £1m. Therefore by the end of January 2022, we estimate Unbound’s net debt position at c £7.0m. At the end of H122, Hotter had IFRS 16 liabilities of £8.3m.

With respect to financial gearing, management targets net debt (pre-IFRS 16 liabilities) of below 2x maintainable EBITDA in the short term, and a net cash position in the medium term without future strategic spend.

Management does not envisage paying a dividend in the near term.

The CVA in FY21 led to the closure of the majority of Hotter’s store portfolio, and the associated costs led to negative net assets, which we forecast to gradually rebuild to positive net assets as profitability and cash generation improve.

We value Unbound using a discounted cash flow (DCF) based valuation analysis, and consider its valuation and growth prospects relative to a range of peers in similar industries.

Our DCF-based valuation extends our published forecasts beyond FY24 to FY32. After FY24, we assume revenue growth rates and profitability in line with management’s medium-term guidance to FY25, before fading revenue growth down to 2% by the terminal year and a stable EBIT margin of 13% from FY24. We reiterate that we include no valuation upside from potential marketplace partnerships.

We assume a weighted average cost of capital of 9.3%, which includes a cost of equity of 12% (risk-free rate 3%, risk premium 6%, beta of 1.5) and a pre-tax cost of debt of 6.5%), giving an equity valuation of £70m or 165p per share. This would represent an EV/sales multiple of 1.4x in FY23 and 1.3x in FY24, and EV/EBIT multiples of 26.1x and 14.6x respectively. Changing the assumptions for the cost of capital and terminal growth rate would change the DCF valuation as follows:

To put our equity valuation of £70m in context, we consider recent valuations attributed to Hotter Shoes by ELTA, which we believe were based on peer group valuation multiples. We also note in this context the positive effect of Unbound’s improved net debt position versus the end of September 2021.

In its second interim results release, to the end of September 2021, ELTA indicated an equity value for Hotter of £59.4m or £33.5m, reflecting a discount for potential transaction risk and liquidity. This valuation excluded other assets and net liabilities to be realised or retained, including the residual shareholding in Hostmore, which totalled £13.2m.

Prior to this, equity valuations for Hotter according to ELTA’s financial statements were volatile: September 2016: £72m, September 2017: £71m, September 2018: £15m and September 2019: £33m, and compare with the ELTA’s initial purchase cost of £85m. We reiterate the changes in Hotter’s financial performance, moving from FY14 revenue of £88.7m and operating profit of £10.0m to FY19 revenue of £93m and an operating loss of £1.8m, all pre-IFRS accounting and worse in FY20 and FY21 due to the CVA and COVID.

Unbound (at this stage Hotter) has few directly comparable peers due to its scale, business mix, geographic exposure and its vertically integrated business model. We also highlight Hotter’s restructuring and the differing levels of disruption on the company from COVID-related lockdowns and subsequent re-openings versus the other companies may make near-term comparison of growth rates and profitability more challenging.

In Exhibit 12, we show consensus estimates and valuation multiples for a number of peers in different categories with a market value below or around £100m: footwear manufacturers/retailers, UK online companies across a broad range of product categories and small-cap retailers including other AIM-listed retailers (there is some overlap with the online companies). All valuation measures are annualised to January, Unbound’s year end.

The footwear companies have a greater global presence and significantly higher market values than Unbound. The median estimated rates of sales growth for FY1 and FY2 of 16% and 13% are comparable with our estimates of Unbound, but these companies are more profitable, warranting a higher multiple than Unbound.

The UK online companies have a wide range of market values due to differing geographic coverage, product mix and therefore size of addressable market. The median expected revenue growth rates of (1%), 12% and 15% for FY1–FY3 are lower than our expectations for Unbound. Our forecasts for Unbound’s EBIT margin of 3.5%, 5.5% and 9.0% in the next three financial years are expected to grow at a better rate than the median for these companies, but there is a wide range of estimated margins for the peers due to a combination of competitive intensities and variable product margins. We therefore believe Unbound’s premium sales growth and potentially improving margin warrant a premium to the median for the online companies, before any size or liquidity discount. We reiterate that our forecasts include no incremental revenue for new digital partnerships.

The small-cap retailers also have a diverse range of product category exposures, greater exposure to physical locations than Unbound and have been affected by the COVID pandemic in different ways, as evidenced by the wide range of expected consensus sales growth rates. The median expected sales growth rate of c 25% in FY1 reflects recovery and growth thereafter of 3–4% is lower than we forecast for Unbound. We therefore believe Unbound’s higher and more consistent expected revenue growth and profitability warrant a higher valuation, before any discount for size or liquidity.

Management’s progress and future strategy with respect to ESG initiatives is summarised as follows: