Warpaint London PLC (AIM:W7L), the low-cost cosmetics firm behind W7 and Technic, has had a rough start to the year, with its shares down 26% despite what analysts at Berenberg argue is a misunderstood story.
The broker has kept its 'buy' rating and 700p price target, insisting the market is getting the wrong end of the stick.
Yes, revenue growth slowed in the second half of 2024. But Berenberg says this was in line with the broader UK beauty market, not a Warpaint-specific problem.
In fact, the company outperformed peers at Superdrug, where it's seen as a key brand helping attract younger shoppers.
Behind the scenes, the investment case is all about margins. Historically, Warpaint’s gross margin moved closely with the wider cosmetics market. Not anymore.
Berenberg points to the company’s own improvements - like new higher-margin “dupe” products, better supply deals, and a growing online channel - as delivering sustainable gains.
Margin expansion in 2023 was around 200 basis points above what would’ve been expected based on market trends alone.
Meanwhile, conversations with industry insiders suggest the tone for 2025 has improved.
January sales were up 15% year-on-year, and a price rise in March could add further upside.
There’s also optimism around a possible Walmart deal. A successful trial run at Christmas, according to experts, means Warpaint could soon be on the shelves of hundreds of US stores.
In Europe, retailers are increasingly turning to affordable brands as the premium cosmetics segment stalls. Warpaint’s penetration in its existing retail partners is still relatively low - only about a third of stores carry its products—offering room to grow without needing new customers.
Despite all that, the shares trade at a chunky discount to peers: 14.5 times forward earnings, versus 23.8 times for the sector median. Even after factoring in recent wobbling revenue, Berenberg sees earnings growth ahead.
If Warpaint edges closer to its long-term gross margin target of 50%, profits could be significantly better than consensus expects.
Put simply, Berenberg sees a company that’s been unfairly punished for a temporary slowdown, while the real story - of operational improvement and growth potential - has been missed. Investors may just need to look past the smudge on the mirror.
In afternoon trading, the shares were down 1.5% at 393p.