Warpaint London strong balance sheet and positive cashflow outlook for H2 2020

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Warpaint London plc (LON:W7L), the specialist supplier of colour cosmetics and owner of the W7 and Technic brands, has announced its unaudited interim results for the six months ended 30 June 2020.

Financial Highlights

Sales reduced 29% to £13.5 million in H1 2020 (H1 2019: £18.9 million) as a result of the Covid-19 restrictions in the UK and internationally

UK revenue decreased by 12% to £6.8 million (H1 2019: £7.7 million)
International revenue decreased by 40% to £6.7 million (H1 2019: £11.2 million)
Gross profit margin increased to 35.1% (H1 2019: 34.9%)
Adjusted profit from operations of £0.4* million (H1 2019: £1.3* million). The majority of this movement can be attributed to:

Overall reduction in gross profit of £1.9 million due to lost sales from the Covid-19 pandemic;
Reduction in overheads of £0.2 million; and
FX gain of £0.6 million (H1 2019: FX loss £0.1 million)
Cash generated from operating activities of £2.3 million (H1 2019: £1.3 million)
Cash of £3.8 million at 30 June 2020 (30 June 2019: £3.7 million)
The board is declaring an interim dividend of 2.8p per share, maintaining the prior year interim dividend of 1.5p per share, together with a one off additional 1.3p per share, to reflect that no final dividend was declared for 2019. This dividend is being declared against a background of good cash control and continued cash generation, along with the robust response of the business through the Covid-19 pandemic

* Adjusted for £0.2 million of exceptional costs (2019: Nil), £1.2 million of amortisation of intangible assets (2019: £1.2 million), and share based payments of £0.3 million (2019: £0.1 million). Adjusted numbers are close to the underlying cash flow performance of the business which is regularly monitored and measured by management.

Operational Highlights

A core range of 100+ W7 products was initially displayed in 56 Tesco Extra stores across the UK and this has now increased to 190 products. Additionally, an impulse range has been developed and is now on display in 41 Tesco Express stores, taking the total number of Tesco stores selling our product to [97]. Sales in Tesco stores have exceeded the directors’ expectations
Approximately 100 exclusive Body Collection branded products, designed in partnership with wilko, are now stocked in 355 wilko stores and over 115 different Technic branded products are stocked in 189 wilko stores. The Group’s products are displayed on bespoke display stands in prime in-store locations and are also sold by wilko.com. In addition, a range of Technic and Body Collection gift sets will be stocked in wilko stores from October 2020 for the Christmas shopping period
Despite Covid-19, Retra has a significant Christmas order book underpinning H2 outlook. Retra’s order book was £8.4 million at 30 June 2020 (30 June 2019: £10.1 million)
Action taken in the US at LMS to reduce cost base, improve margin and provide a full range of Group products and brands
The Group’s expansion strategy continues with active discussions being held with additional major retailers in the UK and overseas
Online strategy accelerated in the UK and the US in response to the Covid-19 pandemic
The Group reacted swiftly to the Covid-19 crisis, quickly formulating a plan of action, and then executing it successfully

Post-Period End Highlights and Outlook

Sales for H2 2020 have recovered well after the Covid-19 lockdown and are steadily approaching the Company’s monthly budget levels set for 2020 prior to the Covid-19 pandemic
For the eight months to 31 August 2020 the Company had unaudited sales of £22.8 million and adjusted profit from operations** of £0.7 million
In response to the pandemic, at each board meeting various scenarios have been modelled based on sales for the full year being down against our internal budget for 2020. Each of these scenarios forecasts a positive EBITDA for the year
The board’s current expectation is that sales for the year ending 31 December 2020 will be approximately £37 million, which should generate adjusted profit from operations** in excess of £2.0 million, on the assumption that there is no material decline in trading conditions as a result of additional Covid-19 related lockdown measures nor any adverse exchange rate movements

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** Adjusted for exceptional costs, amortisation of intangible assets, and share based payments. Adjusted numbers are close to the underlying cash flow performance of the business which is regularly monitored and measured by management.

Commenting, Sam Bazini Chief Executive, said: “The first half of 2020 has been a difficult period for everyone, but we believe that with the actions taken along with the Group’s current financial resources, we are well placed to weather the Covid-19 crisis. We have a global business and the capacity, expertise and strategy to drive our future growth.
“Before the Covid-19 crisis the business was trading well, with higher sales, stronger margins, reduced overheads and higher net profit than budgeted, demonstrating that our business model is strong and that our brands are resonating with customers and consumers. In the short term, Covid-19 has had an impact on our financial performance, resulting in lower than budgeted sales and profits. However, as we start the second half of 2020, sales are beginning to return towards budgeted levels set prior to the Covid-19 pandemic and we are well positioned to take advantage of improving market conditions.
“We continue to monitor the impact of the Covid-19 pandemic, ensuring that we look after customers and staff and take any additional steps if required. Covid-19 will undoubtedly influence our short-term business decisions, however our focus for the remainder of the year and going forward remains on the delivery of our strategic plan which, the board has reviewed and considered in light of Covid-19 and believe remains appropriate and correct.
“With our strong balance sheet (including net cash of £3.8 million) and a positive cashflow outlook for H2 2020, prospects remain encouraging notwithstanding the effects of the Covid-19 pandemic. We have seen a strong sales recovery in the UK since the easing of the Covid-19 lockdowns, with recent sales approaching the Company’s budget set at the beginning of the year. This has been helped by the growing exposure and sales from our W7 brand launch into Tesco in 2020, and the recent launch in September into wilko of Technic and Body Collection.”