Warpaint London – Cosmetics Group, Profitable Since Its Start In 2002, Has Its Interims Out Tomorrow – Shares to 650p? 

Tomorrow morning Warpaint London (LON:W7L) will be announcing its Interim Results for the six months to end-June. 

I hope that the accompanying statement will be bullish enough to get the shares, now 540p, running back up to the 650p level seen at the start of this year. 

The Business 

The company proudly declares that its mission is to ensure everyone has access to high-quality cosmetics at an affordable price. 

Warpaint sells branded cosmetics under the lead brand names of W7 and Technic.   

W7 is sold in the UK primarily to major retailers such as Tesco, Boots and Superdrug and internationally to local distributors or retail chains such as Five Below, Walmart, Normal (DK), Sally’s Beauty and CVS.   

W7 is also available online via its own website, Amazon (US), T mall and Xiaohongshu (China). 

The Technic brand is sold in the UK and continental Europe with a significant focus on the gifting market, principally for high street retailers and supermarkets.   

In addition, Warpaint supplies cosmetics under its other brand names of Man’stuff, Body Collection and Chit Chat, each targeting a different demographic. 

The company outsources manufacturing to ensure competitive pricing, rapid production and an asset light structure. 

The group has not undertaken mass-market TV or radio advertising, but instead, marketing initiatives are considered on a case-by-case, return-on-investment basis, through such activities as trade shows, in-store display furniture, print media/editorials, social media, and via genuine make-up influencers and brand ambassadors. 

The company’s operating expenses are relatively fixed, leverage with scale and evenly spread across the year, enabling its costs to be tightly controlled. 

The group’s warehouses and offices are leased, which means that capex remains low and mostly represents the in-store display furniture provided free of charge for business-to-business customers if they purchase sufficient inventory, and that cost is depreciated over three years. 

Warpaint operates in a growing sector and has been profitable since its inception in 2002, and it remains focused on gross margin, cash generation, and maintaining a strong, debt-free balance sheet. 

26^th June AGM Trading Statement 

Chairman Clive Garston stated that: 

“The Group continues to trade strongly with sales for the six months to 30 June 2024 expected to be approximately £46 million (six months to 30 June 2023: £36.7 million), with margins continuing to be robust and ahead of those achieved in 2023.   

Consistent with previous years, due to Christmas gifting orders and the Group’s momentum, sales are expected to again be second half weighted. 

Further progress continues to be made with expanding the Group’s presence in larger retailers globally and the Group has significant further opportunities to grow sales, both with new and existing customers.   

The Group has a number of planned product roll outs to additional stores in the second half of the year and remains in active discussions with a number of UK and overseas retailers about stocking the Group’s products.” 

Analyst’s View 

There are two analysts that follow the company closely, both rate the shares as a Buy, with the average Price Objective of 590p. 

Analysts Darren Shirley and Clive Black, at the company’s brokers Shore Capital, are estimating that the current year, to end-December, will see revenues rise to £105.0m (£89.6m), while adjusted pre-tax profits will improve to £23.3m (18.5m), lifting earnings to 22.6p (18.5p) and the dividend to 11.3p (9.8p) per share. 

For 2025 they see sales of £116.5m, profits of £29.0m, with earnings of 25.8p and a 12.9p dividend. 

They do have some concerns about rising freight costs but consider that if the current trading momentum can be sustained then the implied H2 FY24F requirements are more than achievable, implying upgrade potential. 

In My View 

The Interims tomorrow should spell out just what impact the shipping charges will have incurred. 

But, as I see it, this group has tight controls and a growing cash balance. 

Its brokers believe that the group remains immature in all its geographies, with very modest market shares underpinning strong growth potential, stating that forecasts continue to look conservative. 

The group’s shares closed on Friday night, up 20p on the day at 540p – which could well prove to be an excellent buying level.