Purplebricks pays price for rapid expansion with U.S. exit

[July 03, 2019]  By Samantha Machado and Noor Zainab Hussain

(Reuters) - Online estate agent Purplebricks said on Wednesday it would pull out of the United States and focus on expanding its roots in Britain, after acknowledging it had chased international growth too aggressively.

The company's decision to quit the United States, which accounts for just 2% of Purplebricks' revenues, follows its decision in May to pull out of Australia.

It also comes after Purplebricks' founder and CEO Michael Bruce quit in May after the pioneering online estate agent admitted it had lowered its standards as it expanded rapidly overseas.

The company was founded in 2014 and entered the United States three years later, confident it could replicate its performance in Britain, where its fast growth quickly made it a market leader. But in May this year, it apologized to shareholders for its disappointing U.S. performance and said it had slashed marketing and other expenses and was reviewing whether it can run a materially scaled back U.S. business.

Chief Executive Officer Vic Darvey told Reuters the company had decided on Tuesday evening to shut or sell the U.S. business and he estimated exit costs at 4 million pounds ($5 million).

"It (exit from U.S.) is a difficult decision because of the people involved but from a leadership position it is a positive decision," Darvey said.

"We are moving into a position of cash generation this year ... we are the largest estate agent in the UK and are targeting 10% market share from the current 4%," he added.

CMC Markets analyst David Madden called the target realistic in the medium term.

Purplebricks, which said on Wednesday that its operating losses nearly doubled in the financial year ended April 30, will stay in Canada, where it bought a Quebec-focused digital estate agency a year ago with plans to expand to other parts of the country.

In Britain, Purplebricks used its low-fee model to win business from bigger, more established estate agents such as Countrywide and Foxtons.

Hoping to achieve the same success in the United States, Purplebricks expanded into seven states in just a year, racking up high marketing costs, but earnings have not matched the estate agent's expectations.

The AIM-listed company is backed by German publisher Axel Springer. British money manager Neil Woodford, one of Purplebricks' longest-standing investors, recently had to suspend his flagship fund and has cut his stake in the estate agent.

A double rainbow is seen above a row of terrace houses in Clapham, south London, Britain September 1, 2015. REUTERS/Dylan Martinez/File Photo

"As Axel Springer recently increased its stake to over 26% the market will continue to speculate as to when and not if it will increase its holding. However, this support will be tempered by concerns over the Woodford holding of 19%," Russell Pointon, analyst at Edison Investment Research, said.

(Graphic: Purplebricks trails UK's big incumbent operators after expansion plan failure - https://tmsnrt.rs/2Yvorbw)

BOUNCE BACK

"This (exit from U.S.) is probably the correct decision to make. It will allow Purplebricks to fine-tune its proposition in the UK and Canada where operations are more established," Russ Mould, investment director at AJ Bell, said.

The company's shares were 2.2% higher at 94.5 pence at 0842 GMT.

"While longer-standing shareholders may have suffered losses ... the new strategy should give Purplebricks a stronger footing to try and bounce back," Mould said.

Darvey declined to comment on possible job cuts.

The company reported on Wednesday a total annual operating loss of 52.3 million pounds.

Revenue rose 55% to 136.5 million pounds, with Canada contributing 23.7 million pounds in its first nine months as part of the Purplebricks group.

The company said it would wind down both its Australian and U.S. operations by the end of 2019, adding the exit was expected to "significantly" reduce cash burn in the future.

Purplebricks entered Australia two and a half years ago and market conditions have since worsened.

(Reporting by Samantha Machado and Noor Zainab Hussain in Bengaluru; Editing by Tomasz Janowski/Louise Heavens/Susan Fenton)

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