Open Letter to RBL Board & Management

I write this post as a shareholder concerned with the large increase in overhead costs communicated to the market on the 22nd of April and the disastrous 40% diminution in shareholder value that has since occurred ($5.51/shr closing price on 21 April vs. $3.31 at the time of writing).

It had already been recognised by the investment community that Redbubble would be entering into a period of moderating growth with lower demand for facemasks and a redirection of discretionary income following lockdown reopenings. Last year during analyst briefings management had made positive comments around the scalability of the RBL platform and EBITDA margin stability/growth as revenues grew. That combined with the cashflow generation saw share prices peak at just over $7 in early 2021.

Overhead and other cost increases were gingerly teased in analyst briefings and a prominent research firm subsequently withdrew coverage. Redbubble's share price withdrew from $7 and traded with a $5.10 $5.90 band, as inflation/interest rate expectations grew and investor sentiment switched to value stocks (higher interest rates result in higher discount rates which disproportionately punish companies promising higher future earnings at the expense of current earnings).

With that thematic already well entrenched I (and apparently your shareholder base) was shocked to read the April investor presentation outlining a dramatic ramp up in spending that would halve EBITDA margins over the next few years and justified by a 3 bullet point strategy outlined over a handful of pages. The market suffered margin whiplash and the rest is history. An announcement like that may have flown in mid 2020 when online europhia was through the rough but certainly not in this environment.

I have become more concerned with this strategy as not only is growth slowing but inflationary pressures are rising and particularly those inputs for your primary products such as tees. The price of cotton, yarn and dyes have risen dramatically and suppliers will lift prices resulting in higher end prices for customers, muting demand and impacting on RBL margins. Supply chain costs are also rising and resulting in further delays.

In this environment- with rapidly slowing mask demand, moderating growth for other products, rising input costs and supply chain issues - I would have thought management would focus on management of resources and cost - making tactical investments in overheads in proportion to revenue increases - rather than this spurge. The fact that this dramatic increase in overhead spend has occurred in the very few months the CEO has had his feet under the table concerns me.

Redbubble has an incredible business model and strong position within its unique market. I encourage the Board and management to undertake a review of their communicated strategy, with a view of:

• Significantly slowing the increase in overheads until the business and market have a firmer understanding of the near term level of demand and sales and inflationaly pressures coming through the system
• Provide much more detail on your growth strategy. The previous release came across and simple and flippant. We need more than a 3 bullet point strategy with a handful of subbullet points. Outline explicitly why these pillars matter, how they can be enhanced with explicit action taken by the company, the level of investment and types of roles including desired outcomes, measurable metrics and timetables. It feels like the strategy is spend it and they shall come, don't worry about earnings for the next few years, and all will be okay in 2024. That to me is not an acceptable strategy. The strategy as presented read to me as a status quo / steady state strategy and one that wouldn't require anywhere that level of investment and halving of EBITDA margins going forward.
• An acknowledgement that near term earnings matter - and we need a highly credible, definable strategy if we are to forgo that in this environment in hopes of it all coming right in 4 or 5 years.
• A programme to regain investor sentiment and credibility.

These are my opinions only as a grumpy shareholder. I hope the Board and Management can right the ship and regain shareholder value and take concrete steps to address the markets concern prior to the next AGM and board elections.