Warpaint London plc (LON:W7L), the specialist supplier of colour cosmetics and owner of the W7 and Technic brands has announced its audited results for the year ended 31 December 2022.
Financial Highlights
| · | Strong growth in sales to reach a record level for the Group. Significant profitability and cash generation during the year reflecting the focus on growing sales of the Group’s branded products |
| · | In 2022 Group sales increased by 28% to £64.1 million (2021: £50.0 million) |
| · UK revenue increased by 9% to £27.6 million (2021: £25.3 million) | |
| · International revenue increased by 48% to £36.5 million (2021: £24.7 million) | |
| · | Gross profit margin increased to 36.4% (2021: 33.8%), despite continued supply side price inflation |
| · | EBITDA increased 56% to £11.7 million (2021: £7.5 million) |
| · | Adjusted profit from operations of £10.3* million (2021: 7.0* million). Statutory profit from operations of £8.0 million (2021: £3.8 million) |
| · | Reported profit before tax of £7.7 million (2021: £3.7 million) |
| · | Adjusted earnings per share increased by 44% to 11.2p* (2021: 7.8p*) |
| · | Cash of £5.9 million at 31 December 2022 (31 December 2021: £4.1 million), with no debt |
| · | Final dividend recommended of 4.5 pence per share (2021: 3.5 pence per share), bringing the total dividend for the year to 7.1 pence per share (2021: 6.0 pence per share) |
*Adjusted numbers are closer to the underlying cash flow performance of the business which is regularly monitored and measured by management, the adjustments made to the statutory numbers are set out in the table below
Operational Highlights
| · | European sales increased by 56% to £28.1 million (2021: £18.0 million), making this the largest sales region for the Group |
| · | Successful launch in Boots of 45 W7 products in an initial 80 stores |
| · | USA sales, in sterling terms, increased by 79% in 2022 to £5.3 million (2021: £3.0 million) and grew by 55% in US dollar terms |
| · | Direct online sales continue to accelerate, with an increase of 106% in Group e-commerce sales in 2022 to account for 4.3% of Group sales (2021: 2.7% of Group sales) |
Post-Period End Highlights
| · Continued strong trading in Q1 2023, with unaudited Group sales for the three months to 31 March 2023 of £18.5 million an increase of 40% on the same period in 2022 (3 months to 31 March 2022: £13.2 million) |
| · Margins in Q1 were robust and better than those achieved in the full year 2022 |
| · Q1 2023 e-commerce sales of £0.83m, 188% ahead of the same period in 2022 (Q1 2022 £0.29m) |
| · Record cash in bank of £8.6 million as at 31 March 2023 and no debt |
| · Continuing brand sales momentum being seen in 2023: |
| o In April 2023, a range of 158 Technic products will be launched in an initial four Asda superstores on a trial basis with a view to a wider inclusion in Asda’s cosmetic range review in Q4 2023 |
| o After an initial trial of W7 product in 20 New Look stores in the UK, the Group is now rolling out W7 product to a further 200 New Look stores |
| o Significant further expansion in the US with H-E-B stores, CVS BIRL stores, where initial sales have been ahead of expectations, as well as launching in Sallys and Nordstrom Rack |
Commenting, Clive Garston, Chairman, said: “I am very pleased with Warpaint’s strong performance in 2022, which reflects the Group’s consistent and focussed strategy. We have concentrated on increasing our presence in larger retailers in all our major markets, both through growing sales to existing customers and entering into new relationships. This strategy of increasing sales to larger customers and providing products that their customers want is reflected in the Group’s results and provides a strong platform for the future. In addition, growing our online presence is a prime objective of the Group.
“Trading has continued to be strong in the first quarter of 2023, with the Group enjoying record first quarter sales. I am optimistic that the strong performance we have seen in 2022 and into 2023 will continue and that we have the right offering and strategy in place to continue to deliver profitable future growth, despite the backdrop of macroeconomic uncertainty.”
HEADLINE RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022
| Statutory Results | Year ended 31 Dec 2022 | Year ended 31 Dec 2021 |
| Revenue | £64.1m | £50.0m |
| Profit from operations | £8.0m | £3.8m |
| Profit margin from operations | 12.4% | 7.6% |
| Profit before tax (“PBT”) | £7.7m | £3.7m |
| Earnings per share (“EPS”) | 8.1p | 3.7p |
| Cash and cash equivalents | £5.9m | £4.1m |
| Adjusted Statutory Results | Year ended 31 Dec 2022 | Year ended 31 Dec 2021 |
| Revenue | £64.1m | £50.0m |
| Adjusted profit from operations | £10.3m* | £7.0m* |
| Adjusted profit margin from operations | 16.1%* | 13.9%* |
| Adjusted PBT | £10.0m* | £6.9m* |
| Adjusted EPS | 11.2p* | 7.8p* |
| Cash and cash equivalents | £5.9m | £4.1m |
Adjusted numbers are closer to the underlying cash flow performance of the business which is regularly monitored and measured by management, the adjustments made to the statutory numbers are as follows:
| 2022 | 2021 | |
| Statutory profit from operations | £7.97m | £3.82m |
| Exceptional items | £0.15m | £0.58m |
| Amortisation | £2.00m | £2.39m |
| Share based payments | £0.19m | £0.18m |
| *Adjusted profit from operations | £10.31m | £6.97m |
| *Adjusted profit margin from operations | £10.31m / £64.06m = 16.09% | £6.97m / £50.00m = 13.94% |
| Statutory PBT | £7.69m | £3.73m |
| Exceptional items | £0.15m | £0.58m |
| Amortisation | £2.00m | £2.39m |
| Share based payments | £0.19m | £0.18m |
| *Adjusted PBT | £10.03m | £6.88m |
| Statutory profit attributable to equity holders | £6.25m | £2.83m |
| Exceptional items | £0.15m | £0.58m |
| Amortisation | £2.00m | £2.39m |
| Share based payments | £0.19m | £0.18m |
| Adjusted profit attributable to equity holders | £8.59m | £5.98m |
| Weighted number of ordinary shares | 76,752,355 | 76,751,187 |
| *Adjusted EPS | 11.19p | 7.80p |
Exceptional items include £nil of staff restructuring and voluntary redundancy costs (2021: £0.03 million), £nil of non-recurring legal costs (2021: £0.18 million), and £0.15 million for content use and associated legal fees (2021: £0.37 million).
CHAIRMAN’S STATEMENT
Warpaint’s business strategy and model has enabled it to withstand the difficult business environment driven by rampant inflation, the war in Ukraine and the aftermath of the Covid epidemic to deliver a very good performance in 2022 and to be in a position to grow further in all its markets. This is due to the dedication of all the Warpaint team and I would like to thank them very much for their energy, flexibility and exceptional efforts. Relationships with our major customers and suppliers continue to be very strong.
During the year we continued our strategy of focusing on increasing our presence in larger retailers globally, through growing sales through our existing relationships and entering into new ones, together with growing our online presence. This focus on larger customers and doing more business with them is reflected in the Group’s results and provides a strong platform for the future.
Trading has continued to be strong in the first quarter of 2023, with the Group enjoying record quarterly sales. We expect demand to remain buoyant and for sales to continue to grow, despite the macroeconomic headwinds.
Results
2022 was a year of significant achievement for the Group, with record sales and profits being delivered.
Adjusted profit from operations was £10.3 million (2021: £7.0 million) on revenue of £64.1 million (2021: £50.0 million) with basic earnings per share of 7.9p (2021: 3.7p) and adjusted earnings per share of 11.0p (2021: 7.8p). Adjusted numbers exclude exceptional costs (staff restructuring and voluntary redundancy costs, certain non-recurring legal costs, stock relocation costs and a provision for content use and associated legal fees), amortisation in relation to acquisitions and share based payments.
Whilst continuing to focus on quick stock turnover, the Group ensured inventory levels were appropriate at the year end to service the anticipated demand in the first quarter of 2023, with inventory at 31 December 2022 increasing to £18.7 million (31 December 2022 £18.1 million). The balance sheet remains strong, with cash at 31 December 2022 of £5.9 million (31 December 2021: £4.1 million), and the Group remains debt free.
Dividend
In accordance with the Group’s policy to continue to pay appropriate dividends, the board is pleased to recommend an increased final dividend of 4.5 pence per share which, if approved by shareholders at the AGM, will be paid on 4 July 2023 to shareholders on the register at 16 June 2023. The shares will go ex-dividend on 15 June 2023.
Board
John Collier, an independent non-executive director of the Company, left the board on 31 December 2022 to focus on his other business interests. I would like to thank John for his contribution to Warpaint and we wish him well in his future endeavours. It is the board’s intention to appoint an additional non-executive director in the second half of 2023.
Annual General Meeting
The Company’s annual general meeting will be held at the Company’s offices at Units B&C, Orbital Forty Six, The Ridgeway Trading Estate, Iver, Bucks, SL0 9HW on 28 June 2023 at 10 a.m. and we will be delighted to welcome those shareholders who are able to attend in person.
Summary and Outlook
I am very pleased with the Group’s strong performance in 2022 and that this has continued in the first quarter of 2023, with the Group enjoying record quarterly sales. This reflects Warpaint’s consistent and focused strategy of increasing our presence in large retailers globally, both by growing sales through our existing relationships and entering into new ones, together with increasing our online presence. This focus on larger customers, doing more business with them and providing what their customers demand is reflected in the Group’s results and provides a strong platform for the future. We also continue to develop relationships with other large retailers, particularly in the UK, Europe and the US, where they are seeing demand from their customers for quality, on trend, but more value orientated brands, such as those produced by the Group.
Notwithstanding the current situation in the Ukraine and current levels of inflation I am optimistic that the strong performance we have seen in 2022 and into 2023 will continue and that we have the right offering and strategy in place to continue to deliver profitable future growth, despite the macroeconomic headwinds.
Clive Garston
Chairman
25 April 2023
CHIEF EXECUTIVE’S STATEMENT
Warpaint London achieved a record level of sales in 2022, reflecting the success of the Group’s strategy of focusing on growing sales of its branded products. This was achieved at an improved gross margin, despite a number of continuing operational challenges being faced, particularly with regard to supply side price inflation.
In 2022, Group sales increased by 28% in 2022 to £64.1 million, reaching a record level for the Group. These sales were achieved at an increased gross margin of 36.4% (2021: 33.8%) despite continued cost pressures and resulted in a reported profit before tax of £7.7 million (2021: £3.7 million). Gross margin is being maintained in Q1 2023 despite the current economic challenges.
Our strategy of producing a wide range of high-quality cosmetics at an affordable price remains our key focus, growing sales through our existing customers’ outlets and winning new customers with significant sales footprints, both in the UK and internationally, together with continuing to grow our online sales. The global cosmetics market is increasingly seeing customers transferring to more value orientated brands, such as those produced by the Group, and I believe we are very well placed with our high-quality focused offering to capture further market share.
Following the rationalisation of our brand portfolio in 2020 the Group has concentrated on its core W7, Technic, Body Collection, Man’stuff and Chit Chat brands during the year. In 2022, sales of the Group’s branded products accounted for 90% of revenue (2021: 89%).
Warpaint has continued to reduce the focus on its close-out business, although profitable close-out opportunities continue to be taken where appropriate. In 2022 close-out sales accounted for £3.8 million (2021: £4.5 million), 6% of Group sales. The remainder of the Group’s sales of £2.6 million (2021: £1.1 million) are white label products for major high street retailers.
W7
The Group’s lead brand remains W7, with sales in 2022 accounting for 55% of total Group revenue (2021: 52%). Overall W7 sales increased by 35% in 2022 to £35.0 million compared to £25.9 million in 2021.
In the UK, W7 revenues were up 7% in 2022 compared to 2021, representing 37% of W7 sales in the year, down from 46% in 2021, as stronger sales growth was experienced in regions outside of the UK and higher than normal levels of inventory were held by certain UK retailers at the start of the year. W7 revenues in the UK grew by increased sales into Tesco, together with a growth in sales from the Group’s other larger customers in the UK. W7 sales in the UK also received a further boost with Boots starting to stock a range of approximately 45 W7 products in an initial 80 stores from February 2022. Sales to date from Boots have been encouraging and we anticipate an increased presence with Boots in due course.
The strongest growth in 2022 was seen in continental Europe, with sales increasing by 77% compared to 2021, and continental Europe became the largest sales region for W7 branded products in the year, accounting for 45% of W7 sales. The Group has benefited from its post Brexit fulfilment strategy, enabling products to enter the EU without issues, and the growth in both the range of European customers served and the expansion in the number of outlets for certain larger customers.
In the US, W7 sales doubled in 2022 compared to 2021, and accounted for 13% of overall W7 sales, with the Group benefiting from the increased number of customers and outlets in the US.
In the rest of the world, W7 sales declined marginally, largely reflective of the timing of certain large orders.
We believe that W7 has a compelling brand proposition and will continue to benefit from consumers wanting a high quality, on trend, but excellent value-for-money product.
Technic
Since the Company’s acquisition of Retra Holdings Limited (“Retra”) and its Technic, Body Collection and Man’stuff brands in November 2017, the focus has been on growing the sales of all year-round cosmetics in addition to continuing to grow its strong and established gifting proposition. It was pleasing to see sales of Technic and the other Retra brands, including Body Collection, grow by 23% in 2022. As a result of the ongoing successful execution of this strategy, the proportion of gifting sales for Retra reduced to 34% in 2022, from 37% in 2021 and 47% in 2020, with single products sold under the Technic brands accounting for 66% of sales in 2022.
Sales of branded Technic product in 2022 was 36% of total Group revenue (2021: 37%). Overall Technic brand sales grew by 23% in 2022 to £22.7 million compared to £18.5 million in 2021.
In 2022, UK revenues were 46% of Technic’s total sales and they increased by 24% over the year, aided by sales of Technic and Body Collection branded products to the retailer, Bodycare. In April 2023, a range of 158 Technic products will be launched in an initial four Asda superstores on a trial basis with a view to a wider inclusion in Asda’s cosmetic range review in Q4 2023.
As with W7, sales of the Technic brands grew strongly in continental Europe during the year and accounted for 48% of Technic’s sales in 2022, an increase of 34% compared to 2021, making continental Europe the largest sales region for the Technic brands.
Sales for the Technic brands outside of the UK and Europe accounted for 6% of Technic sales (2021: 6%). In the USA, sales increased by 58% compared to 2021, and in the rest of the world sales increased by 18% compared to 2021, albeit the sales were small in these regions in the context of the Group as a whole being under 3% of total Group revenues.
Building on the successful sales of W7 branded product through Amazon, a Technic brand store was launched on Amazon in the UK in January 2023 and a number of key Technic lines will be launched on Amazon in the US in Q2 2023 and in continental Europe later in 2023.
The Technic business also produces and sells own brand white label cosmetics for several major high street retailers, with such sales more than doubling to be 4% of Group revenue (2021: 2%). Despite the growth in white label sales in 2022, we continue to assess private label opportunities on a case by case basis, based on the return they can deliver.
Close-out
Close-out sales continue not to be a core focus for the Group, although advantage is taken of profitable close-out opportunities as they become available. The close-out division reduced as a proportion of Group sales in 2022, compared to 2021, representing 6% of the overall revenue of the Group (2021: 9%). Whilst not a core focus, this side of the business continues to provide a significant and profitable source of intelligence in the colour cosmetics market and access to new market trends.
e-Commerce
During 2022 we continued to focus on driving online sales. In addition to growing sales through the W7 and Technic brands’ own bespoke e-commerce sites, the Group has continued to focus on growing sales of our brands in the UK and the US on Amazon, and in China through official W7 brand stores owned by the Group on Taobao Mall (Tmall), the most visited B2C online retail platform in China and Xiaohongshu (Red), one of China’s foremost social media, fashion and luxury shopping platforms. Additionally, W7 product was launched on Amazon EU in Germany, Italy and Spain in 2022.
Direct online sales as a proportion of the Group’s overall sales increased to 4.3% in 2022 (2021: 2.7%), having grown from £0.5 million in 2020 to £1.3 million in 2021, to over £2.8 million in 2022, an increase of 115% from 2021 to 2022.
Online sales have grown further in the current financial year, up 188% in Q1 2023 compared to the same period in 2022, and the focus remains on ensuring a similar margin to the Group’s sales through traditional physical outlets.
In 2023 the Group will launch online sales in Japan through Amazon, a similar model to that successfully deployed in the US, together with launches of the Technic brands on Amazon in the UK, US and continental Europe.
New Product Development
New product development continues to be core to the Group’s proposition to provide new products that are on trend, fast to market and that meet the consumer’s quickly changing needs.
During 2022 our New Product Development Team continued to develop a strong pipeline of new products, focused on the demands of our customers. Our new product development strategy continues to utilise a variety of manufacturing partners, predominantly in China and Europe, that provide high quality products quickly, at very competitive prices, and meet our legal and ethical compliance requirements, together with ensuring continuity of delivery. This process is supported by the Group’s Hong Kong based subsidiary sourcing office 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 Group’s cosmetic products are “cruelty free” and are not tested on animals irrespective of where the products are being supplied. We support cruelty free alternatives to animal testing to become compulsory and animal testing overall to be ceased globally. We will now be proudly displaying the PETA company logo on our products for all new products and as packaging is updated. Our commitment to the PETA “Beauty without Bunnies program” is Group wide and covers all brands within the Group.
The Group is very focused on the environmental impact of its products and the Group is committed to becoming an industry leader for sustainable products and packaging. All unrecyclable plastics have now been removed from the outer packaging of our gifting, and we are progressing well with our journey of removing unrecyclable plastics from our all year-round products. The Group’s product packaging therefore uses paper and cardboard wherever practicable, which enables the Group, the wholesaler and end user to recycle the waste effectively.
All new W7 brand products are being manufactured without parabens and the Company is reformulating existing products where feasible. No heavy metals such as TBTO (preservative) and other ingredients of concern are added to our products and all raw materials comply with the strict regulations applicable in the EU, USA, Canada and other markets in which we operate.
Marketing and PR
We continue to ensure our marketing programmes are both fresh and innovative, focused on both customer loyalty and showcasing our products to new potential consumers, with a particular emphasis on social media using brand ambassadors, influencers and make-up artists. Our online loyalty programme, initiated in 2020, continues to help retain customers and increase basket size.
Strategy
On an annual basis the board reviews and appropriately adapts its three-year strategic plan for the business based on market data, experience and the Group’s aims. This is targeted by year, measured monitored and reviewed as part of the board’s on-going business throughout the year. The strategic plan has been updated for 2023, forming the basis of the Group’s development through to 2025. The plan is designed to drive shareholder value and has defined targets for sales, EBITDA, earnings per share and cash generation with a particular emphasis on driving incremental EBITDA growth.
The strategic plan comprises six key pillars:
· Develop and build the Group’s brands and provide new product development that meets changing trend and consumer needs
The Group ensures that everybody within the business has crystal clarity of the positioning of the Group’s portfolio of brands; that there is a clear brand hierarchy; non-core brands and products have been eliminated; that close-out continues to reduce as a proportion of sales; and the Group delivers quality new product development, category extensions where appropriate to the brand and gifting sets that are on-trend and meets the consumers changing needs.
· Develop and nurture the current core business
A major objective of the Group is to continue to develop and grow the presence of the Warpaint brands beyond their existing customer base. There is still, however, significant potential to be realised and further distribution gains in the current customer base and the Group is committed to ensuring this potential is maximised. The Group is focused on ensuring there is a clarity of product offering to each customer segment and to supporting its customers with relevant new products; by using appropriate marketing and innovative merchandising solution to draw consumers into customer stores; and by enhancing the customer offer by cross selling the Group’s brands and category extensions for example accessories, body mists, gifting and skin care where appropriate.
· Grow market share in the UK
The business continues to focus on increasing the presence of the Group’s brands in channels that our consumers shop in, to increase accessibility and drive profitable market share growth. As a result of this strategy, the Group has successfully launched the W7 brand into Tesco, where distribution gains across all store formats continue to be driven, into Boots, and the Technic and Body Collection brands into wilko. It continues to have active discussions with other major retailers who are currently in channels that the Group is yet to materially supply to and expanding the UK customer base is a key focus of management. For example a trail successfully activated in 20 New Look stores in the fashion retail sector in Autumn 2022, will be rolled out to a further 200 New Look stores in mid 2023. This is a particular focus as the business continues to capitalise on consumers and retailers across all sectors alike who are increasingly looking to provide quality products to their customers at affordable prices.
· Grow market share in the USA and China
The USA and China continue to provide a major growth opportunity for the Group. In the USA, the Group has established distributor and agency channels and is using employees to directly sell to retailers. A compelling core product range for the USA has been established with minimum margin requirements. The business is focused on targeted customer initiatives that have gained both gifting and all year around listings with major retailers across key channels. In China the Group conducts business locally through its Chinese subsidiary company. We are also continuing to register products for sale in China in order to grow our total offering and increase sales. This has led to the development of relationships with distributors in the region who have the capability to drive sales of the W7 brand via a W7 storefront on on-line marketplaces.
· Develop the online/e-commerce strategy for brand development and profitable sales
The Group aims to grow and maximise profitable sales across the Group’s on-line sales channels. As well as continuing to sell on the businesses’ own websites and developing its own consumer community, plans continue to be executed to develop sales across Amazon platforms. W7 stores have been launched in the UK, USA and key European markets on Amazon and are fulfilled by Amazon. Further on-line sales platforms and geographies continue to be evaluated and, where profitable opportunities are identified, launched over the course of the three year plan. The first of these is planned to be Japan in 2023. The Group continues to develop and build its brands by utilising brand ambassadors, influencers and make-up artists to engage actively with its target audience. The Group wants to ensure that consumers are adequately inspired and educated on how the Group’s products can be used to experiment and achieve different looks. Developing the social media strategy also directly impacts the Group’s online sales strategy.
· Develop and implement appropriate strategies that ensure Warpaint reduces its impact on the environment
The Group recognises consumers’, customers’ and our own requirement to reduce our environmental impact. The business has already identified and implemented a number of initiatives to reduce our environmental footprint via reduced shipping and road mileage; removing plastics where possible from packaging and improving recyclability; removing parabens from ingredients; and ensuring all products are manufactured cruelty free. Further initiatives have been identified and targeted with the aim of being implemented across the course of the three year plan. Further information is contained within the ESG section of this report.
Brands
In 2020 we undertook a review of all our brands, and since then the Group has concentrated on its core W7, Technic, Body Collection, Man’stuff and Chit Chat brands, being those with the most compelling market position.
Customers & Geographies
The largest markets for sales of our Group brands are in the UK and continental Europe. In 2022 our top ten customers represented 60% of revenues (2021: 57%). Group sales are made in 43 countries (2021: 43).
UK
The UK accounted for 43% Group sales in 2022 (2021: 51%), with UK sales increasing by 9% to £27.6 million (2021: £25.3 million). Sales growth in the UK was seen by both our lead brand W7, which increased by 7%, and the Technic brands, which increased by 24%. UK sales in Q1 2023 are 23% ahead of the same period in 2022.
The top ten UK Group customers accounted for 74% of UK sales in 2022 (2021: 71%). Particularly strong growth was seen during the year with Asda and Bodycare. Additionally, after an initial trial of W7 product in 20 New Look stores, the Group is now rolling out W7 product to a further 200 New Look stores during 2023. We are also in continued talks with Tesco to increase the W7 offering in their stores and anticipate further expansion across their estate this year.
Europe
In 2022 Group sales in Europe increased by 56% to £28.1 million, compared to £18.0 million in the same period in 2021, making this the largest sales region for the Group, accounting for 46% of Group branded sales in 2022, and 44% of overall Group sales in 2022 (2021: 36%). Sales for the Group’s brands into Europe are mainly to Denmark, Spain, France and Sweden and during the year strong growth was seen particularly through increased sales to certain existing European customers as the number of these customers stores served by the Group was expanded. Group sales in Europe in Q1 2023 continued to accelerate and were 41% ahead of the same period in 2022.
USA
USA sales, in sterling terms, increased by 79% in 2022 to £5.3 million (2021: £3.0 million) and grew by 55% in US dollar terms. This equated to 8% of overall 2022 Group sales (2021: 6%). In the US 97% of sales in 2022 (2021 89%) were from the sale of the Group’s brands as minimal close-out activity was undertaken, in line with the Group’s strategy to focus on its own brands.
A good performance was seen from the Group’s major customers in the USA, including CVS, Five Below, Macys Backstage, Marshalls, and TJ Maxx. Six significant new accounts were added in the US in 2022, including with CVS, where a large Christmas 2022 order was delivered, and with H-E-B stores, a Texas based supermarket group, where an extensive range of nail polish was launched in 280 of their stores in the last quarter of the year. From July 2023 it is expected that a full range of 120 W7 colour cosmetics products will be stocked in 80 of the H-E-B stores.
A further agreement was reached to launch a range of 60 W7 cosmetic products in 190 CVS BIRL stores, from January 2023, and initial sales have been ahead of expectations. Additional orders have also been received from Nordstrom Rack and Sallys in the US, where a significant order has been received for delivery in July 2023. US sales in Q1 2023 are 61% ahead of the same period in 2022.
Rest of the World
Sales in the rest of the world decreased by 16% from £3.7 million in 2021 to £3.1 million in 2022 accounting for 5% of overall Group sales (2021: 7%). The reduction in sales was primarily as a result of the timing of sales orders in Australia, which is a key country for Warpaint in the rest of the world region. The focus in the rest of the world region continues to be on Australia, China and other countries where profitable sales in appropriate volumes can be made.
The Group has no suppliers in either Russia or Ukraine, and no significant historic sales to either country.
People – Cost of Living Bonus
The board recognises that we are living in difficult times, with inflationary pressures causing significant increases in the cost of living. To provide some assistance with these increased living costs and to acknowledge the exceptional efforts in a record period for the Group, all of the Group’s 122 employees (which excludes the board members) were awarded a payment of £1,000 over and above their normal remuneration in October 2022.
Summary and Outlook
I am delighted with the Group’s performance in 2022. We have enjoyed strong growth in sales and that these sales have been achieved at a significantly improved gross margin, despite supply side inflationary pressures, is a significant achievement. To date the Group has been largely able to mitigate supply side inflation with a price rise implemented in January 2022, sourcing product from new factories, and new product development, all of which are ongoing. In 2023, together with significantly reduced transport costs, we remain confident that margins can be maintained.
Whilst we continue to experience good growth in the UK, I am particularly pleased with the growth we are seeing in continental Europe and the US. We have put in place a robust supply chain and distribution network to ensure that we are able to supply our retailer’s outlets on time with the product that their customers are demanding. The Group is also in active discussions with new major retailers globally and with certain existing customers regarding expansion of the range of the Group’s products stocked.
Online sales also continue to grow and the focus remains on ensuring they can deliver a similar margin to the Group’s sales through traditional physical outlets. In 2023, the Group will launch online sales in Japan through Amazon, a similar model to that successfully deployed in the US.
Trading in 2023 has started strongly with a record first quarter. Sales for the first three months of 2023 are approximately 40% ahead of the same period in 2022, with sales increases seen across all of the Group’s brands, both in stores and online, and at an improved gross margin to that achieved in the full year 2022.
We will update further on our progress later in the year and with significant opportunities for further growth, both already secured with our existing retailers and in discussion with additional major retailers globally, I am confident that Warpaint London will continue to perform well for the remainder of the year and beyond.
Sam Bazini
Chief Executive Officer
25 April 2023
CHIEF FINANCIAL OFFICER’S REVIEW
2022 was a record year for the Group, with strong growth in sales, margins and profit before tax. Group revenue increased in the year by 28% and adjusted profit before tax increased by 46%. Gross margin improved in the year by 2.6% to 36.4%. This is the second year running that gross margin has improved despite some increased costs in the supply chain. The Group continues its strategy of building the W7 and Technic brands in the UK and internationally, and we remain focused on margin, being debt free, and generating cash.
The Group monitors its performance using a number of key performance indicators which are agreed and monitored by the board. Headline results, shown below, represent the performance comparisons between the consolidated statements of income for the years ended 31 December 2021 and 31 December 2022.
Revenue
Group revenue for the year increased by 28.1% from £50.0 million in 2021 to £64.1 million in 2022.
Company branded sales were £57.7 million in 2022 (2021: £44.4 million). Our W7 brand had sales in the year of £35.0 million (2021: £25.9 million). Our Technic brand contributed sales of £22.7 million (2021: £18.5 million).
Our Retra subsidiary business had sales of retailer own brand white label cosmetics of £2.6 million in the year (2021: £1.1 million). The white label business is traditionally cost competitive and Retra chooses which projects to undertake based on commercial viability, in particular margin.
The close-out business revenue reduced by 15.8% from £4.5 million in 2021 to £3.8 million in 2022 as the Group, in line with its strategy, continued to reduce its focus on close-out opportunities.
In the UK sales increased by 8.8% to £27.6 million (2021: £25.3 million). Internationally, revenue increased 47.8% from £24.7 million in 2021, to £36.5 million 2022. In Europe Group sales increased by 55.6% to £28.1 million (2021: £18.0 million). In the rest of the world Group sales decreased by 16.0% to £3.1 million (2021: £3.7 million). In the US Group sales increased by 78.8% to £5.3 million (2021: £3.0 million).
E-commerce sales continued to grow in the year and now represent 4.3% / £2.8 million of group revenue (2021: 2.7% / £1.3 million).
Product Gross Margin
Gross margin was 36.4% for the year compared to 33.8% in 2021. Our management teams across the Group were swift to recognise and navigate cost headwinds that started in 2021. New product development, sourcing product from new factories, and an inflationary price increase to customers at the start of the year, have all helped achieve a significant gross margin improvement in 2022.
The cost of freight from the Far East is a significant cost of goods throughout the Group. Container freight rates which increased dramatically in 2021, started to slowly fall in 2022 by on average 20%. As we end Q1 2023 freight rates have fallen from record highs in 2021 to now record lows in 2023, which are currently 80% lower year on year and, if maintained, will help to improve our gross margin in the current year.
We remain focused on improving gross margin where possible in all our businesses and are making good use of our Hong Kong buying office to ensure this happens. To counter currency pressure, we continue to move production to new factories of equal quality to retain or improve margin and have a natural hedge from our US dollar revenue which is growing.
At 31 December 2021 options were in place for the purchase of US$27 million at US$1.3849/£; this has helped to protect our margin in the turbulent foreign exchange markets. Towards the end of 2022 we purchased various options to help protect our gross margin in 2023, these included traditional forward purchase foreign exchange options for US$3 million at US$1.2146, and more complex forward purchase foreign exchange options which will deliver a minimum of $18 million to a maximum of $36 million at an average rate for 2023 of $1.1984/£. Since the start of this year we have purchased more forward options to help protect our gross margin in 2023.
The currency options we have for the current year, the falling container rates, new product development, sourcing, and growing sales in the USA, will all help to protect our margin in 2023.
Operating Expenses
Total operating expenses before exceptional items, amortisation costs, depreciation, foreign exchange movements and share based payments, grew more slowly than sales, increasing by 24.1% to £11.4 million in the year (2021: £9.2 million). Operating costs as a percentage of sales reduced from 18.4% to 17.8%.
The overall increase of £2.2 million in the year was necessary to support the growth of the business.
Increased costs amounted to £2.3 million and were made up of increases in wages and salaries, office costs, travel costs, the spend on PR and marketing as e-commerce sales continue to grow, professional fees and the cost of a larger sales team based in the US.
Included in the increase to wages and salaries is a one off cost of living crisis payment of £0.1 million to all of the Groups employees excluding board members.
The increase in office costs includes an extra £0.06 million of utility charges. At current rates utility costs are expected to increase in 2023 by a further £0.08 million.
There was a decrease in the charge for bad debts of £0.1 million.
Warpaint remains a business with most operating expenses relatively fixed and evenly spread across the whole year. We continue to monitor and examine significant costs to ensure they are controlled and strive to reduce them. In addition, the increased scale of the business has given the Group increased buying power.
Adjusted EBITDA
The board considers Adjusted EBITDA (adjusted for foreign exchange movements, share based payments and exceptional items) a key measure of the performance of the Group and one that is more closely aligned to the success of the business. Adjusted EBITDA for the year was £11.9 million (2021: £7.7 million).
Profit Before Tax
Group profit before tax for the year was £7.7 million (2021: £3.7 million). The material changes in profitability between 2022 and 2021 were:
| Effect on Profit | |
| Sales volume growth | £4.7 million |
| Margin growth | £1.7 million |
| Increase in operating expenses | (£2.2) million |
| FX gain in 2022 £0.1 million (2021: Gain £0.6 million) | (£0.5) million |
| Increase in finance costs | (£0.2) million |
| Increase in depreciation and amortisation of right-of-use assets | (£0.3) million |
| Decrease in the charge for amortisation costs on acquisition* | £0.4 million |
| Decrease in exceptional costs | £0.4 million |
*Acquisition costs are amortised over 5 years. The reduction in 2022 reflects the end of the write off period since the purchase of Retra in November 2017.
Exceptional Items
Exceptional items include £nil of staff restructuring and voluntary redundancy costs (2021: £0.03 million), £nil of non-recurring legal costs (2021: £0.18 million), and £0.15 million for content use and associated legal fees (2021: £0.37 million).
During the year the Group agreed a settlement regarding a dispute with a third party relating to the historic use of content on the Group’s social media platforms in the period from 2018 through to early 2021. The total settlement including associated legal costs was £0.52 million, of which £0.37 million was provided for in the year to 31 December 2021. The payment and the restriction of content use will not affect the ongoing operations of the Group’s businesses.
Tax
The tax rate for the Group for 2022 was 19% compared to the UK corporation tax standard rate of 19% for the year. Since the acquisition of LMS, the Group is exposed to tax in the USA at an effective rate of approximately 25% and in other jurisdictions the Group operates cost centres, but these are not materially exposed to changes in tax rates.
Earnings Per Share
The statutory basic and diluted earnings per share was 8.14p and 8.11p respectively in 2022 (2021: 3.69p and 3.68p).
The adjusted basic and diluted earnings per share before exceptional items, amortisation costs and share based payments was 11.19p and 11.15p respectively in 2022 (2021: 7.80p and 7.79p).
Dividends
The board is recommending a final dividend for 2022 of 4.5 pence per share, making a total dividend for the year of 7.1 pence per share of which 2.6 pence per share was paid on 25 November 2022 (2021: total dividend of 6.0 pence per share, of which the interim dividend was 2.5 pence per share and the final dividend was 3.5 pence per share). The dividend for the year was covered 1.6 times by adjusted earnings per share.
Cash Flow and Cash Position
Net cash flow generated from operating activities was £8.4 million (2021: £5.1 million). The Group’s cash balance increased by £1.8 million to £5.9 million in 2022 (2021: £4.1 million). The cash generated was principally used to make dividend payments in the year.
We expect capital expenditure requirements of the Group to remain low, however as part of our strategy to grow market share in the UK and US there will be occasions where investment in store furniture is required to secure that business.
In 2022 £0.29 million was spent on store furniture for Tesco, Boots and wilko (2021: £0.49 million), £0.42 million was spent on warehouse improvements, new forklifts and racking (2021: £0.04 million), £0.09 million was spent on new computer software and equipment (2021: £0.02 million), and £0.03 million was spent on other general office fixtures and fittings and plant upgrades (2021: £0.04 million).
Given the growth of the Group in the last two years it is necessary and prudent to have bank facilities available to it to help fund day to day working capital requirements as the Group continues to grow. Accordingly the Group maintains a £9.5 million invoice and stock finance facility which is used to help fund imports in our gifting business during the peak season. At the year end no invoice and stock finance remained outstanding (2021: £nil million). In addition, in February 2023 the Group added a new “general purpose” facility of £3 million. These facilities, together with the Groups positive cash generation and the growing cash balance held, ensure that future growth can be funded.
LTIP, EMI & CSOP Share Options
On 17 October 2022 CSOP share options were granted over a total of 20,000 ordinary shares of 25p each in the Company under the Warpaint London plc Company Share Option Plan. The options provide the right to acquire 20,000 ordinary shares at an exercise price of 132.5p per ordinary share.
On 2 March 2022 EMI (non-qualifying) share options were granted over a total of 200,000 ordinary shares of 25p each in the Company under the Warpaint London plc Enterprise Management Incentive Scheme. The options provide the right to acquire 200,000 ordinary shares at an exercise price of 127.5p per ordinary share.
The LTIP, EMI & CSOP share options had an immaterial dilutive impact on earnings per share in the period. The share-based payment charge of the LTIP, EMI and CSOP share options for the year was £0.19 million (2021: £0.18 million) and has been taken to the share option reserve.
Balance Sheet
Inventory was £0.6 million higher at the year end at £18.7 million (2021: £18.1 million). The rise in inventory is a function of growth in the business and to ensure delivery disruption is avoided for our customers. One of the Group’s unique selling propositions is that it can deliver a full range of colour cosmetics to our customers, in good time all year round. Having appropriate inventory levels is vital to providing that service. The provision for old and slow inventory was £0.37 million, 1.9% at the year end (2021: £0.52 million, 2.8%). Across the Group we have worked hard in the year to sell through older stock lines, allowing for our provision for old and slow inventory to fall 0.9% in percentage terms. Our Group policy is to provide for 50% of the cost of perishable items that are over two years old. However, we remain comforted by the fact that many such items in the normal course of business are eventually sold through our close-out division without a loss to the Group.
Trade receivables are monitored by management to ensure collection is made to terms, to reduce the risk of bad debt and to control debtor days, which have improved on the prior year. At the year end trade receivables, excluding other receivables, were £9.9 million (2021: £8.8 million), the increase on 2021 due to the rise in sales year on year. The provision for bad and doubtful debts carried forward at the year end was £0.07 million, 0.7% of gross trade receivables (2021: £0.07 million, 0.8%).
The Group has no borrowings or lease liabilities outstanding at the year end (2021: £nil), apart from those associated with right-of-use assets as directed by IFRS 16 (see below). The Group was therefore debt free at the year end.
Working capital increased by £4.1 million in the year, to £30.3 million. The main components were an increase in inventory of £0.6 million, an increase in trade and other receivables of £1.4 million, an increase in cash at the year end of £1.8 million, and a decrease in trade and other payables of £0.3 million.
Free cash flow (cash from operating activities less capital expenditure) remained strong at £7.6 million (2021: £4.5 million).
The Group’s balance sheet remains in a very healthy position. Net assets totalled £37.8 million at 31 December 2022, an increase of £1.7 million from 2021. Most of the balance sheet is made up of liquid assets of inventory, trade receivables and cash. Included in the balance sheet is £7.3 million of goodwill (2021: £7.3 million) and £0.3 million of intangible fixed assets (2021: £2.3 million) arising from acquisition accounting. As at the year end cash totalled £5.9 million (31 December 2021: £4.1 million).
Goodwill represents the excess of consideration over the fair value of the Group’s share of the net identifiable assets of the acquired business / cash generating units at the date of acquisition. The carrying value at 31 December 2022 of £7.3 million included Treasured Scents Limited (Close-out business) £0.5 million, Retra Holdings Limited £6.2 million and Marvin Leeds Marketing Services, Inc. £0.6 million. Management have performed the required annual impairment review at 31 December 2022 and have concluded that no impairment is indicated for Treasured Scents Limited, Retra Holdings Limited or Marvin Leeds Marketing Services, Inc. as the recoverable amount exceeds the carrying value.
The balance sheet also includes £5.7 million of right-of-use assets, this is the inclusion of the Group leasehold properties, now recognised as right-of-use assets as directed by IFRS 16. An equivalent lease liability is included of £5.9 million at the balance sheet date.
Foreign Exchange
The Group imports most of its finished goods from China paid for in US dollars, which are purchased throughout the year at spot as needed, or by taking forward purchase foreign exchange options when rates are deemed favourable, and with consideration for the budget rate set by the board for the year. Similarly, foreign exchange options are taken to sell forward our expected Euro income in the year to ensure our sales margin is protected.
We started 2022 with options in place for the purchase of US$27 million at US$1.3849, and the sale of €3.9 million at €1.1558. During 2022 when currency rates were favourable, we purchased additional US dollar foreign exchange options and spot rate amounts to cover our total US dollar requirement for the year.
In addition, towards the end of 2022 we purchased various options to help protect our gross margin in 2023, these included traditional forward purchase foreign exchange options for US$3 million at US$1.2146, and more complex forward purchase foreign exchange options known as Window Barrier Accruals and Counter TARFs which will deliver a minimum of $18 million to a maximum of $36 million (depending on the dollar rate at maturity of each option) at an average rate for 2023 of $1.1984/£. We also sold €3.8 million at €1.1340. All of these options were outstanding at 31 December 2022.
The Group has a natural hedge from sales to the US which are entirely in US dollars, in 2022 these sales were $6.32 million (2021: $4.08 million).
Together with sourcing product from new factories where it makes commercial sense to do so, new product development, and by buying US dollars when rates are favourable, we are able to mitigate the effect of a strong US dollar against sterling.
Section 172(1) Statement
The directors are well aware of their duty under section 172 of the Companies Act 2006 to act in the way which they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
· the likely consequences of any decision in the long term;
· the interests of the Company’s employees;
· the need to foster the Company’s business relationships with suppliers, customers and others;
· the impact of the Company’s operations on the community and the environment;
· the desirability of the Company maintaining a reputation for high standards of business conduct, and
· the need to act fairly as between members of the Company
(the “Section 172 (1) Matters”).
Induction materials provided on appointment include an explanation of directors’ duties, and the board is regularly reminded of the Section 172(1) Matters, as a board meeting agenda item.
Further information on how the directors have had regard to the Section 172(1) Matters can be found in the Stakeholder Engagement and Section 172 Report. This information forms part of the strategic report and has been approved for issue by the board on 25 April 2023.
Neil Rodol
Chief Financial Officer
25 April 2023
