4imprint’s first half trading was heavily affected by the commercial repercussions of the COVID-19 pandemic as it spread across the US. With uncertainty over the speed and extent of the reopening of the US economy, projections for the remainder of the year (and for FY21) are more tentative than usual. Despite the difficult trading circumstances, 4imprint retains a strong, cash positive balance sheet, and has low fixed costs and capital requirements. We believe that it retains its long-term attractions in a large, fragmented market and should rebuild quickly as the economy recovers
It is unsurprising that branded promotional products have not been top-of-mind for corporate America recently. 4imprint’s H120 revenues were down 34% on H119 and we have made a further cautionary cut to our FY20 revenue forecast to $535m from $550m. Our FY21 revenue number is unchanged, but we have taken a more cautious view on margins. The first two months of FY20 were strong, with order intake up 13%, but at the nadir in April, orders were more than 80% below prior year. 4imprint retained its full workforce, working from home wherever possible. This has had a clear impact on operating profit, to a little over break-even in H120, from $19.4m in H119. However, customer relationships have been nurtured and average order value increased by 6%. New customers made up 27% of H120 orders (H119: 29%). Some competitors have had more resilient sales, but many have pivoted to supplying unbranded personal protective equipment.
The key to 4imprint’s historical success is the careful and intricate management of the marketing spend, which is managed to grow the revenues while maintaining a broadly stable operating margin. This period has obviously presented a different set of priorities and marketing spend was reined in by 40% to $47.2m, of which just $9.5m was in Q2, implying revenue per marketing dollar in H1 of $5.64, a little ahead of recent levels. The emphasis has shifted further to brand promotion, which should help drive further market share gains as the trading environment improves.
With so much uncertainty regarding how and at what speed the US economy will continue to recover our earnings forecasts are tentative and valuation judgements based on them are subjective. 4imprint has a market-leading position, a low fixed cost base and limited capital requirements, attractive cash flow characteristics and a cash positive balance sheet, all of which justify its premium rating. 4imprint trades on an FY19 EV/EBITDA of 12.0x, compared to marketing services stocks on 7.2x.