Tomorrow morning will see the announcement of the 2023 Final Results for Warpaint London (LON:W7L) – they will show a significant advance in both sales and profits for that year.
Yesterday the group’s shares leapt over 4% to trade 18p higher to close at 465p, after touching 474p at one stage.
Although already rated on some 26 times estimated 2023 earnings, the shares would see many professional investors shying away – especially after the stock has risen from 365p on Friday 5th April – too far, too fast, perhaps.
Inevitably they will ease back to trade again within the 350p to 425p price range.
And that is when more risk tolerant and patient investors should be taking their positions in this group’s growth equity.
The Business
Founded in 1992, the Iver-based business provides colour cosmetics.
It operates through two segments, Branded and Close-Out.
The £363m capitalised company offers its cosmetic skincare products under the W7, Technic, Man’stuff, Body Collection, Very Vegan, and Chit Chat brand names.
It also provides supply chain management services.
The company sells its products to retailers, distributors, supermarkets, and retail chains, as well as through online channels.
The business operates in the UK, the rest of Europe, Spain, Denmark, the USA, Australia, New Zealand, and internationally.
The Main Brands
W7, which represents 55% of revenue, is a design-focused cosmetic brand with a focus on the 16-34 age range, delivering high-quality cosmetics at affordable prices.
It is sold in the UK primarily to major retailers such as Tesco and Boots, and internationally to local distributors or retail chains such as Normal (DK) and Five Below (US).
W7 is also available online via its own website, Amazon (US), Tmall and Xiaohongshu (China).
The Technic brand, which represents 36% of revenue, 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 own-brand white-label cosmetics produced for several major high street retailers, which represents around 4% of the group’s revenues.
It also sells cosmetics using its other brand names of Man’stuff, Body Collection, and Chit Chat, each targeting a different demographic.
The group is geographically diverse, with its home market representing 43% of revenue, continental Europe 44%, the US 8% and its products that are sold in a further 43 markets represent some 5% of revenue.
Recent Trading Update
Two weeks ago, the group issued an Update on its trading in the year to end December 2023, together with a Q1 report.
Following continued strong trading in the final quarter of last year, sales and profit before tax for 2023 had exceeded previous expectations.
It reported that the strong trading had continued in Q1 2024, with sales showing a record first quarter at £23.5m, some 28% ahead, with margins continuing to be robust and ahead of those achieved in 2023.
Analyst View
At Shore Capital Markets their analysts, Darren Shirley and Clive Black, are looking forward to the group publishing its 2023 results on Wednesday, upon which they will present a ‘comprehensive review’ of their forecasts.
Their estimates for the year to end December 2023 were for revenues of £89.5m (£64.0m), with adjusted pre-tax profits leaping ahead to £18.0m (£10.0m), taking earnings up to 18.0p (11.2p) and increasing its dividend to 11.5p (7.1p) per share.
Ahead of the results the analysts are going for sales rising to £95.0m this year and then £104.0m next year, lifting profits to £19.1m then £21.0m, with earnings of 18.6p then 20.5p and dividends of 11.6p then 12.8p per share respectively.
If that occurs, then the group will have shown a strong progression over those five years.
My View
Despite its very high price-to earnings ratio, I am impressed that the group has no debt and boasts around £7.5m of cash in its balance sheet.
Sensibly it outsources its manufacturing requirement to ensure competitive pricing, rapid production and thereby creating ‘an asset-light structure.’
That enables it to remain focused on its gross margin, its cash generation and maintaining its impressive balance sheet.
If you are a patient investor in Warpaint, buying upon any dips in the price, then I believe that you will be onto a winner.