Yahoo Finance This business has the right ingredients to continue offering sparkle and shine
One strategy adopted by investors is to follow the good news, buying stocks that keep raising earnings guidance. W7 cosmetics provider Warpaint London certainly fits the bill as it has upgraded earnings expectations four times since last September.
The business is profitable, pays a dividend, is cash-rich, has no debt and is growing organically. These attributes are highly prized by investors and are a rarity among companies on Aim, of which Warpaint is a member.
A stagnant or weakening economy plays to its strengths. Warpaint supplies products that people use every day including foundation, eyeliner, lipstick and nail polish. They sell for affordable prices, which is exactly what shoppers want when times are hard. Everyone needs a pick-me-up from time to time and a new lipstick is a simple and cheap way of putting a smile on your face.
Sam Bazini, its chief executive, suggests shoppers are even trading down from more expensive cosmetic brands, citing visits to supermarkets where he has found £10 Maybelline or Rimmel mascara discarded next to Warpaint’s W7 display units.
One conclusion to draw is the shopper changed their mind and picked up W7 mascara instead, which costs a third of the price. The share price has doubled over the past 12 months. However, the valuation is far from expensive with the stock trading on 18.8 times forecast earnings for 2023 and 16.6 times 2024’s estimates.
The growth opportunity is simple to understand and credible. Warpaint believes it will get more business from existing clients and add more stockists, particularly in the US. The cherry on top is a medium-term goal to grow an e-commerce business in China, with encouraging progress so far.
It does not need to make acquisitions to turbocharge growth – existing clients are already lining up to put Warpaint products in more stores, having seen positive sales figures from initial pilots.
For example, over the past three years Warpaint has gone from being in 54 Tesco stores as a pilot to now stocked in 1,400 of the supermarket’s outlets. A 20-store trial with New Look last year has led to the retailer agreeing to stock Warpaint products in a further 180 stores. In the US, it now appears in 250 H-E-B stores and a trial has begun with Sally’s, a Texas-based retailer with a 5,000-store estate.
The first substantial US client was CVS. An initial trial to sell seasonal gift boxes became a trojan horse for an agreement that was extended to 190 stores with year-round products. A similar strategy is in play with Asda.
This is where Warpaint sees big opportunities – the company has its foot in the door with multiple retailers where it hopes to go from being in double-digit store numbers to hundreds or thousands of sites.
The goal is to sell more products to more people. That means ongoing product innovation. Just like the fast-fashion industry where clothing sellers are quick to copy the latest trend and get products on the shelves quickly, Warpaint watches social media and the high street for what is trending and it claims to be able to produce an affordable copycat version within three to six months.
The rise of TikTok and YouTube means younger people regularly consume videos on how to apply make-up and enhance their appearance, hence why Warpaint is pushing its Chit Chat brand at the pre-teen market, with W7 catering for teens and adults. The origins of the company lie in buying end of line or excess stock of cosmetics and fragrances and selling them via discount retailers.
While it gives Warpaint insight into what is selling in the market and what is not, the activity now only accounts for 4pc of revenue and is likely to end in the next few years. What is the downside for investors? One risk of buying a share that has already done well is existing investors take profits, which can pull down the price.
Another is that a company that has frequently upgraded guidance only meets, rather than exceeds, expectations at the next trading update or financial results. In that situation, one might expect some investors to exit the stock in the belief it has lost momentum.
The consensus analyst forecast is for Warpaint to make £14.5m adjusted pre-tax profit in 2023, up from £10m in 2022. That rises to £16.7m for 2024 and £19m in 2025. No share goes up in a straight line, yet the progress Warpaint has already made and the projections for where it could go next would suggest this stock has the right ingredients to continue offering sparkle and shine.
Questor says: buy
Ticker: W7L
Share price at close: 270p
Dan Coatsworth is a stock market analyst at AJ Bell
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