Warpaint London PLC (LON:W7L) strategy is to provide customers with access to an extensive range of high-quality and affordable cosmetics. Its focus has been to develop its flagship brand, W7, while capitalising on the growth potential of e-commerce and international expansion. The UK retail environment remains challenging; while Warpaint continues to grow well in the more successful retailers, growth is being hampered by a significant tail of customers ceasing to trade. As ever, results are heavily skewed towards H2: the order book is currently looking solid, but the UK consumer outlook is subdued, and the next few weeks are likely to shape the financial performance for the whole year.
Strategy for growth maintained
H1 delivered sales growth of 2.9% to £18.9m and improved gross margins in all areas except the lower-margin US. Guidance was maintained as the company continues its strategy of business integration and international growth. Management has been increasing its PR and marketing budget, and has increased its stocks in order to support growth. Meanwhile, action to reduce the cost base is aimed at bringing US margins to a level similar to those of the UK. Retra, the gifting business acquired in November 2017, reached EBITDA break-even in H119 (previously loss-making), helped by a reduction in costs, better product development and an improved Christmas order book. End-June cash was £3.7m.
Further expansion
Warpaint is building internationally recognised brands, starting with its flagship W7 brand. By enhancing distribution and marketing platforms to incorporate social media and e-commerce, its offering has become more widely available to an international audience. Management is set to continue growing the business, both domestically and internationally. Expansion in the US and China continues to provide strong growth. In its domestic UK market, the subdued consumer outlook is causing both challenges and opportunities. While Warpaint’s smaller customers are coming under pressure, the large retail operators are more interested in Warpaint’s value offering as they seek to compete more effectively with the discounters.
Valuation
Warpaint trades at a substantial discount to the international cosmetics sector. This is warranted by its smaller scale, value proposition, less-recognised brands and own-label offering. We believe the discount could narrow, contingent on continued successful delivery of management guidance, hence validating the strategy. We note current consensus is higher than management guidance.
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Consensus estimates
Business description
Warpaint London is a UK-based company engaged in the colour cosmetics business, both domestically and overseas. It comprises two divisions: close-out and own-brand. The latter consists of a selection of brands, with the key focus on the company’s flagship brand, W7.