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Warpaint London

Warpaint London PLC Increase international sales by 7%

Warpaint London plc (LON: W7L), the specialist supplier of colour cosmetics and owner of the W7 and Technic brands, has today announced its unaudited interim results for the six months ended 30 June 2019.

Financial Highlights

· Sales up 2.9% to £18.9 million in H1 2019 (H1 2018: £18.4 million)

· International Group revenue increased by 7.8% to £11.1 million (H1 2018: £10.3 million)

· W7 brand delivered continued export sales growth year on year in the EU +12.4% and US +45.4%*1 on a like for like US$ basis

· Gross profit margin reduced to 34.9% (H1 2018: 36.5%) due to impact of lower margin US sales

· Gross profit margin (excluding business conducted in the US) has improved to 37.8% (H1 2018: 36.4%)

· Adjusted profit from operations of £1.2 million in H1 2019 (before exceptional Items and amortisation costs) (H1 2018: £2.6 million). The majority of the movement in adjusted profit is due to:

o Inclusion of Leeds Marketing Services Inc (“LMS”) £0.5 million operating costs in H1 2019;

o Overall reduction in gross profit margin;

o Increased PR and marketing spend of £0.3 million to support sales initiatives; and

o The effect of a charge of £0.1 million in H1 2019 in connection with IFRS 16 (leases),

· Retra (the business acquired by the Group in November 2017, including the Technic brand) achieved breakeven EBITDA in H1 2019 (H1 2018: £0.5 million loss)

· Reported loss before tax of £0.2 million (H1 2018 profit before tax of £1.3 million)

· Cash generated from operations of £2.0 million (H1 2018: £4.0 million) after investment in stock of £6.1 million to cover inventory in the US and Retra stock to maximise the sales opportunity

· Cash of £3.7 million at 30 June 2019 (30 June 2018: £5.5 million)

· Interim dividend maintained at 1.5 p per share

Operational Highlights

· International growth strategy in place and delivering

· Action taken at Retra to reduce costs and improve new product development

· Improved Christmas order book to be delivered by Retra, underpinning H2 outlook. Retra order book of £10.1 million at 30 June 2019 (30 June 2018: £9.5 million)

· Action taken at LMS to reduce cost base, improve margin and provide full range of Group product and brands

· PR spend to support growth and customers

*1 Like for like numbers are comparisons year on year of the US business LMS as if it had been part of the Group throughout 2018.

Commenting, Sam Bazini and Eoin Macleod, Warpaint London plc Joint Chief Executives, said:

“In a challenging retail market, particularly in the UK, the business is showing resilience and adapting to the changing market conditions, increasing international sales by 7.8% and seeing an improvement in the performance of Retra.

“Now that LMS is part of the enlarged Group this has accelerated our growth into the largest colour cosmetics market in the world and provides useful dollar based income.

“The Group’s cosmetic brands remains the primary strategic focus of the Group, with significant sales of Christmas gifting being delivered in the second half of the year. As in 2018, we expect overall Group earnings to be weighted to the second half of this financial year.

“We have implemented a strategy in the UK which we believe will increase sales of the W7 brand over the medium term. In the US, we have made an encouraging start in H1 2019 with sales made by LMS up 36% on a like for like basis, and for the W7 brand, up 45% (“like for like” numbers are comparisons year on year of the US business LMS as if it had been part of the Group throughout 2018 and in US$). We have increased our marketing spend in the US to drive brand awareness and to help support sales initiatives, which should deliver revenue in the second half of 2019.

“With our strong financial foundation and having net cash, prospects remain encouraging and Warpaint is well positioned to deliver future growth. The outlook for the Group as we follow our growth strategy, remains positive.

“Our previous guidance remains unchanged. Group sales are expected to be approximately £50 million and adjusted profit before tax (excluding amortisation in connection with acquisitions, share incentive scheme costs and exceptional items, which the board expects to total approximately £2.8 million) will be in the range of £6 million to £7 million, for the financial year to 31 December 2019.”

Joint Chief Executives’ Review

In H1 2019 sales of colour cosmetics under the Group’s brands accounted for 82% of turnover (H1 2018: 84%). The small drop in Group brand sales percentage is due to additional close-out sales made in the US by LMS. Selling cosmetics under the Group’s brands remains the primary strategic focus, with significant sales of Christmas gifting expected to be delivered in the second half of the year. As in 2018, we expect overall Group earnings to be weighted to the second half of this financial year.

The Group’s lead brand remains W7, with sales in H1 2019 accounting for 54% of total revenue (H1 2018: 59%). In the UK, W7 revenues were down 11% in H1 2019 compared to H1 2018, due to the continuing tough trading conditions in the UK high street. We have implemented a strategy in the UK, in particular targeted at adding a number of new retailers for the Group, which we believe will increase sales of the W7 brand in the medium term. Whilst the UK was challenging, W7 brand sales continued to grow in Europe, which were up 12% compared to H1 2018, and the US, which were up 45% on H1 2018 on a like for like basis (“like for like” numbers are comparisons year on year of the US business LMS as if it had been part of the Group throughout 2018). In the Rest of the World, W7 sales were down on H1 2018 by 36%, this region being the smallest part of total W7 sales, primarily due to the timing of certain larger orders.

Since the acquisition of Retra in November 2017, we have taken steps to improve the sales of the all year round cosmetics sold under the Retra brands, to make the business profitable throughout the year and not only in the second half when Christmas gifting is delivered (this being 53% of Retra sales in 2018). We have seen an improvement in H1 2019, with Retra delivering break-even EBITDA for the half year (H1 2018: EBITDA loss £0.5 million).

On 2 August 2018 the Group acquired its US distributor, LMS, which is now fully integrated into the Group. Prior to the date of acquisition two thirds of LMS revenue was from distributing W7 products, the remainder being the sale of other branded cosmetics through its close-out activities.

The US is the largest colour cosmetics market in the world and developing sales into the region is a strategic goal for the growth of our brands. We have relocated the sales office of LMS to the heart of Manhattan, New York, with a showroom displaying all the Group brands and situated in a building where other health and beauty businesses are located. This will be more convenient for buyers and should help increase sales. We have made an encouraging start in H1 2019 with sales made by LMS up 36% on a like for like basis compared to H1 2018 and, in particular, for the W7 brand, up 45%.

During the first half of the year we have increased our marketing spend in the US to drive brand awareness and to help support sales initiatives, which should help increase revenue in the second half of 2019. This includes an additional member of staff employed specifically to generate new business. We are also taking a number of measures to improve the margin in the US business, including changing our third party warehousing arrangements to reduce costs.

We continue to use manufacturing partners in China and Europe for our Group branded products, giving us the flexibility to choose those manufacturers we feel deliver the best product for the best price, and meet our legal and ethical compliance requirements. Helping in this process is the Group’s Hong Kong based subsidiary sourcing office (acquired as part of the Retra transaction) and its China subsidiary (Jinhua Badgequo Cosmetics Trading Company Ltd), with local employees able to explore new factories and oversee quality control and ethical sourcing.

The close-out division in the H1 2019 represented 18% of the overall revenue of the Group. Whilst not a core focus, this side of the business provides a significant source of intelligence in the colour cosmetics market and access to new market trends. Although close-out is less significant for the Group’s strategy, it has had a very good first half of 2019 with sales ahead of the same period in 2018 by 11.8%. This increase is entirely due to the close-out sales made in the US following the acquisition of LMS in August 2018.

The W7 brand is supported by an informed customer base, driven by the success of beauty blogs, celebrity endorsement and social media. We have applied the same approach during the year to the Retra brands with Technic and Man’stuff now having their own bespoke e-commerce sites. A similar marketing strategy has been deployed for our US e-commerce site launched during 2018, with sales made in local currency and with local fulfilment in place. Our strategy of producing a wide range of high quality cosmetics at an affordable price has remained our key focus and we are very pleased with the reaction that our expanding product range received during the year to date.

Strategy

In early 2018 the Board adopted a three year strategic plan for the business, which is measured, monitored and reviewed annually. The plan is designed to drive shareholder value and has defined targets for sales, EBITDA, earnings per share, cash and share price. The strategic plan was amended by the Board in early 2019 and includes six revised key strategic priorities:

1. Continue to develop and build our brands

We continue to build our major brands, by utilising brand ambassadors, bloggers and vloggers to engage with our target audience. Much of this is done through social media campaigns to educate and interact with our loyal brand users.

Other brands will continue to be used for customer bespoke orders and we are actively seeking sales partnerships with additional high street retailers who serve our target demographic, particularly in the UK. The bestselling lines in each range and brand have been identified to be launched in trial programmes in new retail outlets with the goal of delivering increased presence in the high street and growing market share.

2. Provide New Product Developments (“NPD”) that meets consumers changing needs and taste

A key focus of the business and NPD team is to supply our customers with a wide range of affordable, high quality cosmetics. The NPD team is made aware of our required margin and minimum sales revenue per item before development begins, but affordability and quality remain important drivers in the development process.

While most of our brand ranges include core colour cosmetic items, we add on trend items and colourways developed by our growing NPD team, especially in our all year round ranges of our lead brands, W7 and Technic. This on trend and quick to market model is something our customers demand and expect from us.

Our Body Collection brand is being developed further to cater for the growing mature female cosmetics market, the Man’stuff brand allows us the opportunity to develop a growing male grooming market and our Very Vegan range continues to grow as a vegan lifestyle or product choice becomes more prevalent.

With our lead brands we are exploring opportunities in new sales channels and product categories e.g. tattoos, body scented sprays, and health and beauty accessories.

3. Grow market share in the UK

Following the Retra acquisition, we have started developing the combined customer base of the enlarged business to sell all brands to all customers in the UK and overseas. Over 75% of the UK market remains unexploited by us, in particular pharmacy chains and several high street multiples and grocers. Expanding the UK customer base and market share is a key focus of management.

4. Grow market share in the US and China

The acquisition of LMS, together with the US e-commerce site, is enabling a more rapid expansion in the US. A detailed sales and marketing plan for growth in the US is currently in development, including the use of a locally based digital PR agency.

In China, we are conducting business locally through our China subsidiary company. We are continuing to register products for sale in China in order to grow our total offering and increase sales.

5. Develop an online / e-commerce strategy for brand development and sales

Of W7’s target customers, market research indicates 45% are buying colour cosmetics online. We are currently considering a differentiated brand offering which will be available exclusively online.

6. Develop the appropriate organisational structure and people plan

Our roles have been further defined to avoid overlap of time and effort as the business continues to grow.

We continue to review the structures, resources and capabilities in the business with the objective of delivering the three year strategic plan, and communicate the plan throughout the Group to key staff.

Brands

In the first half of 2019 the Group continued to focus on the development of the Group’s brands. Since acquiring Retra in November 2017 the focus has been on assisting the Retra product development team to make an improved, all year round, cosmetics offering and, the Retra sales team to get listings for their brands in accounts that W7 was already listed in, particularly overseas. This has helped the Technic brand in H1 2019 to gain a larger proportion of Group sales compared to H1 2018.

 H1 2019H1 2018
Group brand sales  % %  
W7  66% 73%  
Technic  24% 19%  
Other Group brands  10% 8%   
   100% 100%  

Products

The largest selling product categories across all the Group brands, including white label sales, are eye products, face make-up and lip products, which together represented approximately 76% of revenue in H1 2019 (H1 2018: 79%).

H1 2019 product sales split for all our brands was as follows:

Eyes38%
Face28%
Lip10%
Nails7%
Gift5%
Brushes4%
Others4%
Accessories & Sets3%
Men1%
  

Customers & Geographies

The largest customers for sales of our Group brands are in the UK, US, Australia and Europe. In 2018 our top ten Group brand customers represented 50% of revenues, this increased to 57% of total revenue in H1 2019.

US

We have continued to see growth in the US through our now acquired distributor LMS. Group sales for all our brands and close-out products sold into the US were up in the first half, increasing 36% compared to H1 2018 on a like for like basis. Current customers include Century 21, Macys Backstage, Marshalls, Bealls and TJ Maxx. Through our new showroom in New York we are now selling all the Group brands and promoting them with local PR activity and a larger sales team.

Europe

Group sales in Europe increased in H1 2019 by 17% compared to the same period in 2018. The W7 brand has seen European growth of 12% in the first half of 2019 against the same period last year. The Retra brands have seen significant European growth of 52% in H1 2019, through the introduction to existing W7 retailers.

Rest of the World

Sales in our Rest of the World region for the Group are down by 30% in the period, compared to the corresponding period last year. This is due to a reduction in orders from our Australian distributor for W7 in the first half of the year and a change in distributor in China and Hong Kong. We expect sales to the Rest of the World region to improve in the second half of 2019.

UK

Trading conditions in the UK remain challenging because of the UK high street slow down and ongoing Brexit anxiety. Group sales in the UK were down by 6% in H1 2019 compared to H1 2018.

For W7 alone, sales in the UK were down 11% for H1 2019 compared to H1 2018, most of which was due to the loss of customers that have gone into liquidation or closed their businesses, customers that have restructured with less outlets, or customers that have ongoing credit issues. We are, however, addressing this through targeting a number of new UK retailers for the Group. The top ten UK W7 customers accounted for 75% of W7 UK sales in H1 2019 (H1 2018: 67%). Sales to these customers grew by 2% in H1 2019, compared to H1 2018.

As of 30 June 2019 Retra have a larger order book for Christmas gifting than at 30 June 2018 already secured, which will be delivered during H2 2019. This will be the primary driver of revenues being weighted to the second half of the year, and most of it will be in the UK. Retra sales in the UK were up 4% for H1 2019, compared to H1 2018, some of which was from the introduction of the Retra brands to existing UK customers of the Group. All but one significant UK Retra customer grew sales in H1 2019 compared to H1 2018.

Summary

The first half of 2019 has presented challenging conditions for Warpaint, particularly in the UK, and the trading environment remains so. Nevertheless, the business has shown resilience and adapted to the changing market conditions, managing to increase international sales by 7.8% and seeing an improvement in the EBITDA performance of Retra.

Having the LMS team in our enlarged Group has accelerated our growth into the largest colour cosmetics market in the world and provides useful dollar based income. We are now applying our management expertise and industry knowledge to improve the results of LMS to contribute more positively to the Group results.

With our strong financial foundation and having net cash, prospects remain encouraging. The outlook for the Group as we follow and adopt our growth strategy, remains positive.

Sam Bazini and Eoin Macleod

Joint Chief Executive Officers

18 September 2019