Warpaint London (W7L)

[Gamesinvestor]

Welcome feedback on this company originally founded by two rivals in the cosmetics industry.

Warpaint has grown business over the last 5 years and has promoted sales via social media to some effect with the brands such as W7 and Technic under its division called “Own Brands”. These brands are sold in the UK and Europe via retailers and wholesalers with and emphasis on the gifting market.

They have expanded their brands with these – Man’stuff, Body Collection, Vintage, Very Vegan, and Chit Chat.

Very Vegan has been a particular hit of late with the emphasis on healthily living and Vegan products everywhere.

The brands are sold through Superdrug, Asda and Boots but more recently they signed deals for all Wilko stores and the latest was a very successful pilot trial with Tesco - here is the release:

“Warpaint also said Tesco had agreed to sell its products in more branches after an initial period. The supermarket chain has sold 15 W7 products in 209 Tesco Express stores since November and starting in February they will be available in another 678 branches.”

The Tesco Announcement was made in February so apart from the successful trial, it will take some time for the positive impact of sales to come from all 469 branches.

Looking at the numbers and taking into account the 2017 acquisition of Retra with emphasis on the gifting market, revenue has grown from £17M in 2015 to £49M in 2019 before the 2020 Covid hit.

More recently they announced a recovery:
“Warpaint said the upgrade was the result of “a result of stronger than previously anticipated trading in the second half”. Its shares jumped 13% to 95p at 08:06 GMT.”

Capex over the last 5 years has been fairly light with just £2-300K a year spend against annual profits of over typically £4M+ except for a drop off in 2019. Dividends have been reinstated as business activity recovered and the 2019 dividend was reintroduced with the 2020 declaration.

The US business was hit pretty hard with sales falling to $1.1M (1H2020) from $2.8M (1H 2019) but this is now on a recovery path with more emphasis on the branding.

Whilst this is not an extensive analysis, the balance sheet seems relatively secure, the business is recovering and it’s not inconceivable that this stock could double again in the next year or so, but that is not a forecast or in anyway an unwise prediction.

Games - Declared interest - I hold just over 20K shares in the company that is marginally underwater at present.

[MaynardPaton]

Hi Games

Many thanks for the write-up. I looked at W7L for SharePad during 2018.

I was put off by the flagging W7L sales, the acquisition and the apparent dependence on online influencers. But I did like management’s background and 50% holding, plus the ‘challenger’ approach of selling good quality make-up at affordable prices.

From the 2019 report, I am pleased to see influencers relegated from Pillar 1 to Pillar 5 of the six key strategic pillars. Deals with Tesco etc suggest the business is taking a more conventional route to greater sales. This RNS is particularly interesting. Paying a 24-month 3-4% sales commission to get a foothold in another supermarket seems worthwhile.

Cash is greater than debt, which is helpful, but trade debtors at c20% of revenue are not small and cash collection will only extend with the likes of Tesco now on board. I also notice the business carries significant levels of stock.

The 2019 report indicates stock was £16m and cost of stock for the year was £29m – so stock seemingly sits in the warehouse for more than six months. Not very efficient (although lipstick presumably has a long shelf life), and no wonder most employees work in the warehouse:

3 people employed in sales does not sound great. I wonder if sales duties were performed historically by the two founders, and perhaps their ‘wheeler-dealer’ backgrounds could only take the business so far – which is why they agreed to the aforementioned 3-4% commission incentive in that RNS.

The business reported an adjusted operating profit of £8m for 2018, so the £71m market cap at 93p would not seem outlandish if a recovery back to that heyday can occur. The latest financials are of course blighted by the pandemic and the acquisitions do not help matters, so a fair amount of leeway is required with the accounting assessment.

Mind you, I think a bit of scuttlebutt on W7L make-up could prove advantageous here. Certainly the typical private investor is not a W7L customer, and greater insight here could put us one step ahead of the crowd. Is W7L becoming popular? The prospect of W7L becoming a major brand is a tantalising thought for investors.

Maynard

[Gamesinvestor]

I think I overlooked the amount of stock. Interesting thought though is should we be moving into a roaring 20’s post pandemic, perhaps we might see roaring inflation to go with it. Supply chains for many goods have been hit during the last year. I had a hard time getting hold of basic materials like plasterboard, cement etc, although this is hardly comparable to cosmetics which presumably have been in relatively low demand. As Lord Wolfson stated early on in the pandemic, you don’t buy new clothes and cosmetics for a Zoom call.
On the positive side, the cost of the next 12 months sales may come mainly from stock and hence profits could be enhanced because of this.
This is by no means a sure thing of course, but I’m willing to give it some time for the Tesco activity to bed in and hopefully for the main retail market to reopen in the UK and the US – I expect the EU’s problematic vaccine program will mean up to a year delay for Europe to kick in.
I assume also that a good % of stock will now be deployed in the 600+ Tesco stores from February onward.
The low number of sales people could be a worry, however Warpaint have been quite effective at exploiting social media and viral marketing.
I should be careful not to talk my own book here of course - lol!

Games

[Bill1703]

@Gamesinvestor

I think I overlooked the amount of stock. Interesting thought though is should we be moving into a roaring 20’s post pandemic, perhaps we might see roaring inflation to go with it.

We will probably see some “roaring” inflation numbers in the near-term… but further out, there are still some powerful deflationary forces at play - in part, bolstered by the pandemic. I would say we are looking at structurally low inflation well into the medium term, at least…

And refreshing my view on Warpaint, which seems like the polite thing to do, given I have barged into this thread - not looked at it for a while.

Clearly there is some scope for SP appreciation as conditions “normalise”, given where we are now (still) - and where it has come from.

But not obviously cheap on even visibility a year or so out… More “fair value” than anything for me on pre-pandemic (ie. FY 2019) numbers, 15x P/E, 11x EV/EBITDA - okay, not exactly a growth rating, but I wouldn’t pay any more than this given that it will clearly be FY 2022 at least before they regain these 2019 levels (if they ever do, of course).

And FCF yields (on the current SP) of 4-5% on 2018/2019 numbers also leave me underwhelmed, for what should be a high free-cash-generating model - and given their own stated focus on FCF in the immediate pre-pandemic period.

The balance sheet looks very solid though, and you would say that at least there is NOT too much post-pandemic-recovery hope (hype?) already priced in, such as you have increasingly elsewhere… so probably not a bad risk/reward profile, for any investor looking properly far enough ahead. I wouldn’t be buying here - but equally, if I were you Games, I wouldn’t be selling either.

[Gamesinvestor]

Well it looks like the Tesco deal is starting to have an impact –

"Warpaint London PLC - Buckinghamshire-based cosmetics maker - Reports strong trading continued in first quarter of 2021 after better-than-expected second half of 2020. Sales increased and gross margin widened year-on-year. Tesco PLC is stocking an additional 15 product lines in 600 large supermarkets, and has placed a substantial order for Christmas. US retailer Five Below is stocking products in over 1,000 stores following successful trial. Warpaint plans to launch Amazon.com Inc EU store in “near future” as online sales accelerate. Results for 2020 to be released on April 28.

Current stock price: 122.00 pence, up 13% on Tuesday

Year-to-date change: up 61%

Games