4Imprint, which distributes promotional products, such as stationery, mugs and T-shirts, was originally added to Trader Portfolio 1 at 237p in March ’12 and after we took part profits at 1940p (in February ’18) it went on to peak at over 3500p in the months before the Pandemic hit, making for an almost fifteen-fold gain at the high! Shortly afterwards it fell through our stop-loss as Covid-19 ravaged its markets but this year it has undergone a spectacular renaissance.
In May analysts were obliged to raise eps forecasts by a barnstorming 41% to 156 cents thanks to “a very strong performance in the first four months” while two subsequent upgrades caused eps to be raised another 45% to 225.9 cents (186.7p) with pretax profit reaching US$83.7m. That compares with its previous peak in FY’19 of 152.4 cents and US$54.7m pretax. But I think there could be even more fireworks for investors and one broker, Barclays, has already raised its price target to £48 and believes that current year pretax profit could ultimately reach US$100m-US$110m if first half revenue growth is sustained in the mid- teens. Under that scenario its price target would rise to £81.
Disposals released huge potential
4Imprint was founded by Dick Nelson as Nelson Marketing in Logansport, Indiana, in 1985 and 11 years later was acquired by Bemrose, owner of several diverse specialist print and packaging operations including Letts, the famous diaries and calendars business.
Following a shareholder rebellion in 2003, when takeover talks with private equity group, Hanover Investments, broke down, the original team walked the plank and a new management was brought in. They viewed the print & packaging side as too capital intensive and the diaries at risk of obsolescence due to the shift towards electronic organisers (later themselves eaten by the free diary Apps in smartphones).
As a result, these businesses were sold off, with the group concentrating on its promotional products business. At that stage 4Imprint was left with two divisions in the UK and USA but the former, trading as Brand Addition – which is now back on AIM as the wheels turn full circle- was over-dependant on just three customers and its subsequent disposal not only eliminated a low quality business but also allowed 4Imprint to plug a large hole in its pension deficit.
Eps up 480% between FY’11-‘19
While it’s retained a small marketing operation in the UK based in Manchester, that contributed less than 2% group sales in FY’21, the other 98% comes from the USA-based promotional products business. Under the leadership of divisional USA head Kevin Lyons-Tarr, who was later promoted to CEO, the company has gone from strength to strength. Back in 2011 it had sales of US$192.4m, pretax profit of US$9.8m and eps of 26.6 cents but fast forwarding to 2019, the last undisturbed year before the Pandemic, that had increased to US$861m, US$54.7m and 154.4 cents.
“Bust a US$1 billion” hit a year early
A further measure of the amazing momentum running through the business is that early in 2018 it had set a target to increase revenue from US$627m the previous year to US$ 1billion by 2022 but following those three upgrades, analysts now expect sales to increase to US$1,041m this year, rising to US$1,144m and US$1,256m. Meanwhile pretax profit is expected to be US$83.7m, rising to US$92.5m and then US$104.2m in FY’24 for eps of 225.9 cents (186.7p), 244.8 cents (203p) and then 275.2 cents (227.7p).
Wide range of products
Based in Oshkosh, Wisconsin, 4Imprint supplies tens of thousands of promotional products such as t-shirts, fleeces, sweaters, pens, key rings and other office accessories as well as bags, badges, mugs and watches. In recent years it’s added conference bags, lap top sleeves, parasols, gazebos, phone stands, wireless headphones, Bluetooth speakers, women’s hoodies, sports towels, vacuum bottles and flags. It’s also developed own brands including Crossland for outdoor apparel such as fleece jackets, backpacks and coolers; refresh (metal drinkware); and TaskRight, for everyday stationery such as notepads and sticky pads.
Apparel fastest growing category
CEO Kevin Lyons Tarr, who I met with over the month, says Apparel is the fastest growing category, having been under-indexed for years and now accounts for well north of 20% of sales. The other significant categories are drinkware, writing tools and bags.
These products will typically have the name and / or logo of the client emblazoned onto them and are purchased by a wide range of individuals within all types of businesses and organizations, typically with at least 25 members of staff. These products are used as part of a client’s sales and marketing campaign, such as at a trade show or promotional giveaway for a welcome kit; to promote health & safety initiatives; and as a thank you for employee / volunteer recognition schemes.
Still just 5% market share
Customers are defined as the individual placing the order, rather than the business or organization for which the individual works. To give you an idea of the quantum of its growth back in FY’11 it achieved 450,000 total orders, but fast forward to FY’21 and that had increased to 1,429,000 orders, representing 90% of former peak levels in ’19. This has propelled the group to its position as the market leader but there’s still bags of room to grow with its market share just 5% of the estimated US$20 billion US / Canadian market for promotional products. The market itself is highly fragmented and out of the estimated 26,000 other distributors, fewer than 1,000 have annual revenues of more than US$2.5m.
Industry grew 46% in 12 years
But this is not just a story about taking share from rivals, because the promotional products market itself has enjoyed significant growth as companies view it as providing better “bang for their buck” than other forms of media like traditional radio and television advertising. Figures from the Advertising Specialty Institute (ASI) show that North American sales grew from US$15.9 billion in FY’09 to US$25.8 bn in FY’19 and after dropping to US$20.7 bn when Covid-29 hit the following year, they recovered to US$23.2bn in FY’21, up around 46% over 12 years. It goes without saying that 4 Imprint has substantially outperformed this.
Repeat customers: 70% of total
However, the real power under the hood is 4Imprint’s canny marketing strategy. With the business long established for nearly 40 years it has built up a large and valuable database of customers. In order to generate new business these were historically mailed paper catalogues through the post and by emails, supplementary mailings and telephone calls. Save for exceptionally difficult trading conditions, 4Imprint typically makes a modest profit on recruiting new customers after covering the costs of off-the-page or internet advertising but the real gains are made from repeat orders, which are higher margin because the cost of marketing has already been absorbed.
Thanks to canny techniques such as “blue box” targeted sample mailings, which “deliver the showroom to the customer,” repeat orders in FY’21 accounted for a massive 70% of total orders of 1,429,000.
Soaring revenue / marketing dollar
However even that doesn’t tell the whole story. Back in early 2018 it tweaked its marketing strategy with the aim of increasing its brand awareness and adding a level of agility in order to “flex” marketing investment to suit the changing economic climate. That involved a reduction in direct mail investment (reducing print, catalogues, postage costs) and an increase in TV and online advertising spend. As Lyons-Tarr says, the TV and internet advertising is simply about helping explain what the company does and what it stands for and getting that message to the widest possible audience.
At the same time management introduced a new KPI metric – revenues / marketing US$ - to track its effectiveness. With management better able to tailor investment according to market demand, this key metric improved from 5.58 in FY’19 to 6.17 in ’21 but this year has been more dramatic still, climbing to a record 8.0. That in turn has driven a 14% increase in both order counts and average order values in H1 2022 versus H1 ’19 (i.e. pre-Pandemic).
With gross margins remaining steady the benefits of operational leverage (i.e. higher sales on a relatively fixed cost base) are expected to drive operating margins up from 3.9% to 7.5% this year.
High returns on capital
The icing on the cake for shareholders is that 4Imprint has a proverbial licence to generate free cash. It doesn’t manufacture any of its products itself and is therefore not required to fund hefty capital expenditure on expensive equipment. Instead, it outsources to a network of suppliers, who hold the “blank” inventory and after receiving the order and accompanying art work (i.e. including customer branding) from 4Imprint will print it and send it on to the customer. It’s a “just in time” model and 4Imprint holds very little inventory.
With only modest capital required to run the business, its average return on capital employed between FY’17-’19 was 82-86% and while that dipped to 41% last year it’s expected to recover quickly.
One issue that dogged it last year was rising shipping / freight costs and supply chain disruption but these have started to recede. There is also a short-term risk of softer demand in the US as interest rates rise further but that ability to flex marketing spend will smooth any bumps.
Another special dividend likely
With the company having largely resolved its long standing pension deficit, CFO David Seekings notes that annual payments of just US$4m are required to set up a scheduled buy-out in FY’24 after which point it will be “free and clear,” as the Americans say. As a result, net cash, currently a healthy US$66m, is forecast to reach US$117m by FY’24, which raises the prospect of a special dividend alongside an expected regular one of 127 cents (105p) this year (yield: 2.8%).
Its usual H1/H2 pretax profit split is 36/64 but Barclays notes the latest H1 22 pretax profit of US$44 is 53% of full year forecasts, implying more hefty upgrades in store should its run rate continue. Based on that, the soon to be prospective PE of 18.3 and then 16.4 is too low. I am a buyer.
