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I love hunting the London stock market’s AIM index for up-and-coming FTSE shares. It’s often where the most exciting growth stories begin — and sometimes where unfairly punished stocks can be found at bargain prices.
One company that’s caught my attention lately is Warpaint London (LSE: W7L), a cosmetics retailer that’s fallen sharply this year but still looks impressively profitable.
Now trading just over £2, £500 would net me around 226 of the shares. But would that be a good idea?
Let’s have a look.
Betting on beauty
Warpaint sells branded cosmetics under the lead names W7 and Technic, alongside a mix of others like Man’stuff, Body Collection, and Chit Chat.
Most of its products are sold in the UK through major retailers, with growing international sales via distributors and retail chains. The Technic brand has a strong focus on the gifting market, a segment that performs particularly well during the festive season.
Earlier this year, the group made a bold move to expand its reach. In February, it acquired several well-known health, beauty and personal care brands — including Skin & Tan, Super Facialist, Dirty Works, and Fish Soho. They’re all part of its strategy to diversify and grow.
Crunching the numbers
In September, the stock took a nasty tumble after the company lowered its full-year guidance. That spooked investors, leading to a share price down by almost 58% so far this year.
Yet, when looking at the numbers, the business still appears solid. In the latest results for the six months to 30 June, revenue rose 8% to £49.3m, helped by the February acquisition. UK sales jumped nearly 16% to £18m, showing strong domestic demand. However, profitability took a hit from non-cash foreign exchange losses and one-off acquisition-related costs.
As a result, EBITDA slipped 5% to £10.8m, while profit before tax plunged 41% to £6.4m.
Even so, a return on equity (ROE) of 25% is nothing short of impressive. That’s the kind of number usually reserved for top-tier growth stocks, not a small-cap beauty brand. The fall in profit seems largely due to short-term factors rather than a deeper structural problem, which could make the current valuation look overly pessimistic.
The risks
Of course, this is still a small-cap share, which means volatility is par for the course. A weaker pound or supply chain cost spikes could easily erode margins. Plus, integration risks from the Brand Architekts acquisition also remain. Combining multiple consumer brands can be tricky, especially when they compete for the same retail shelf space.
Another concern is that the company’s recent strong growth might have set unrealistic expectations. If sales momentum slows, the market might continue to punish the share price.
My verdict
A recovery’s never guaranteed, which is always a consideration when chasing value stocks. But what I like about Warpaint is that it remains highly profitable and offers a 5% dividend yield — a welcome boost for income investors.
Plus, the dividend’s been growing every year since Covid, showing management’s commitment to shareholder returns.
Even if the share price doesn’t bounce back immediately, that income stream makes it easier to wait. And if it does recover, well, that could turn a decent holding into a very rewarding one.
For me, this is a compelling FTSE share to consider for both value and income portfolios.
