4imprint’s order volumes are starting to recover as the US economy reopens. The company has been diligent at updating the market and the latest update shows order levels improving towards 50% of prior year, having dipped as low as 20% in early April. Cash conservation measures are having the desired effect and the group still had $28.1m cash (with lease debt only) at the end of May, despite having paid out $9.4m as a one-off lump sum into the pension scheme as scheduled. Based on assumptions over the speed and extent of the recovery but in the absence of formal management guidance, we have reinstated provisional forecasts.
In earlier trading updates, management outlined order volumes in January and February ahead by 13% over FY19. By early April, these had dropped sharply to around 20% of prior year levels. As the US economy slowly rebounds, weekly order counts have rebuilt to nearer half of those achieved in June 2019. By making assumptions about the ‘normal’ monthly sales distribution and pencilling in a steady build across H220 up to 80% of order volume by the year end, we have derived a revenue estimate for the year of $550m, which assumes a direct correlation between order volumes and order values. For FY21e, we have pencilled in an 9% increase from the lower levels, roughly the gain we were anticipating before withdrawing forecasts, but off the lower base.
Translating this into an earnings figure involves significant levels of speculation, with marketing spend the key variable. This spend was not turned off completely in H1, with continuing brand awareness campaigns online and on TV. We assume that mailshots and sample boxes, however, will have been paused. The group has retained its staff throughout the pandemic, with most either working from home or unutilised, waiting to be recalled. Office and warehouse locations in the US and in the UK have now reopened. We have assumed a lower FY20 gross margin (28% from 32%), slightly reduced marketing spend and lower capex for the year.
Having started the year at all-time highs around £35, the share price fell away sharply in March as the severity of the potential impact on the US economy became apparent. From a low of £13.20, the shares have staged a good recovery. While reduced earnings prospects for FY20e and FY21e and lower cash inflate multiples, 4imprint’s fundamentals remain favourable, with a cash-positive balance sheet and a growing share of a what will still be a substantial market for promotional goods.
