Innovaderma, tough decisions have impact on this years results, however they're now in a much better position.

What a difference half a year makes. Back at the beginning of the year the company was extremely confident of hitting £14million turnover and £2.5million in profits for the year ended 30th of June 2018. The actual numbers were significantly less than that at £10.7 million and £0.67million respectively.

So why the big drop? Well at the beginning of the year the company had big plans, Skinny Tan its main brand was doing well and was going to be expanded in numerous international countries, especially the USA. Roots Double Effect its in house haircare brand which had launched in August 2017 was starting to gain traction. It was going to launch numerous other brands; Stevie K a colour cosmetics brand, Charles and Lee a men’s grooming brand, Enbright a product to target the multi billion £ skin whitening market, Prolong a FDA approved device to help people who suffer from Premature Ejaculation and HAIR(MD) a laser helmet to help regrow hair. It all sounded extremely promising so what happened?

There were a few issues, but by far the biggest is that Superdrug, by far and away Innovaderma’s(IDP) biggest customer, tried to get (IDP) to extend their Skinny Tan exclusivity which is due to expire in February 2019, when IDP declined Superdrug dramatically reduced their order volumes. This impacted cashflow and meant IDP didn’t have enough cash for all the products it wanted to launch. There were also rumours that STEVIE K cosmetics and Charles and Lee were due to launch in Superdrug and that also got cancelled. In effect Superdrug tried to blackmail us and we refused to pay. I for one think that, despite the short-term pain, it was the right decision.

The fallout from all this is that Superdrug reduced the shelf space of Skinny Tan within its stores. Replacing them with other tanning brands. This meant that they didn’t need to order as much stock. Overall Skinny tan revenues in the second half of the year were roughly comparable to the second half of FY2017. So there was no growth from Skinny Tan despite Direct to consumer (DTC) sales rising 36%. This means there must have been an actual decline in Superdrug orders, despite sales out to customers from Superdrug rising by 12% during the year. This shows that the main reason for the decline is the destocking by Superdrug, which now looks to have plateaued, and not a decline in consumer demand.
So back IDP we were (mainly) a one brand one customer company. They could have carried on like that and grown one or two other brands within Superdrug, but they would always have been at the mercy of Superdrug.

They took, what in my opinion was the brave and right decision, to not extend the Superdrug exclusivity and therefore take short term instability and pain for longer term stability and gain.

The main result of this is that product launches were postponed or cancelled and the growth was set back. However, it looks like IDP and hopefully investors are finally seeing the light at the end of the tunnel.

They are now becoming a multi brand, multi retailer proposition and whilst that transition is happening slowly we should really see the main benefits of that in FY2020.

Personal Care Division

Skinny Tan, which is currently still the main brand is overall doing well with good UK consumer growth, offset by Superdrug destocking and relatively poor international growth. However the big news for Skinny tan is that it is going to launch in 1250 Boots stores in March 2019, just in time for the main tanning season. This will increase the door count by over 150% and significantly reduce IDP exposure to Superdrug. Just this deal alone should create a strong second half of FY2019 performance, with house broker Finncapp estimating that the initial stock order alone could be worth £750,000 or 7% of previous years turnover. In addition, Skinny Tan has launched various new products towards then end of FY2018 which should add to FY2019 growth. International expansion is also on the cards, mainly through distributors, which should limit the capital requirements of this expansion.

Roots Double effect is the second biggest brand and over the next few years has the potential to overtake Skinny Tan as IDP’s biggest brand. Despite only launching in August 2018 it has, from a standing start, had turnover of nearly £1million with just 5 products and just from DTC and 400 Superdrug stores. In the current financial year growth will come from new product development with the total currently up to 9 and plans to double that by the end of the financial year. However the main growth will come from increasing store numbers. From 400 Superdrug stores in FY2018 they will now be in 779 Superdrug stores, 359 Boots stores (from August) and 400 Tesco stores from November, that is already a rise of 400% in store numbers, with more expected over the course of the current financial year. It’s very difficult to put a number on turnover for Roots for the coming year. Finncapp have put a, in my opinion very conservative, £2.7 million number on it. Roots is an especially important brand as it is not seasonal, unlike Skinny Tan, and it operates in a much bigger market and could be sold virtually anywhere in the world. Initially international expansion is planned, through distributors, for South Africa, Canada and India with potentially more to follow.

Charles and Lee, an Australian men’s grooming brand is currently not contributing much to overall turnover and profits, however it is being nurtured and gradual expansion should see it start to make a more meaningful contribution. Last financial year it was in 30 Myers stores in Australia. From August this year Charles and Lee was in 65 independent pharmacies in New Zealand and 250 Terry White Chemmart stores. In addition, at the results it was announced that Priceline would stock Charles and Lee before the Christmas gifting market, but no details were issued as to how many of the companies 450 stores this would entail. International expansion is also planned, mainly through distribution in South Africa, India and the UK.

Stevie K Cosmetics is currently on the backburner although they have announced a potential launch this financial year, but that won’t generate any meaningful revenue in that period. They currently have enough to keep them busy with the rapid expansion of the other products and as such Enbright, the skin whitening brand, looks to be completely off the table.

Life Sciences Division

Prolong
The main revenue driver of this division looks set to be Prolong, this was launched, with a very detailed campaign, in May and in the first two months they sold 622 units just in Australia and the USA on an annualised basis this would be about $1million of turnover. Unfortunately, there was a quality control issue with the product and they are having to find a new manufacturer and active promotion of the product has been postponed. However, they hope to recommence marketing and sales by the start of the second half of the financial year. The new manufacturer will also reduce costs by 40% meaning IDP can reduce the selling price in markets like India and china, where there are a lot of sufferers of premature Ejaculation, but disposable incomes are low. With annualised revenue of $1million from just the USA and Australia and with plans in place to enter Canada, Japan, India, China and Europe, Prolong has the potential to be a material revenue and profit generator in the mid to long term. However, I would suggest any meaningful contribution is unlikely till FY2020.
The only other current product in the life sciences division is the Headmaster wearable, FDA approved, helmet to aid hair generation and reduce hair loss. This has not yet been launched first orders have been placed for the product with an expected launch in the second half of the current financial year. I am not pencilling anything in my forecasts for this as it’s too early stage.

My conservative forecasts for turnover in fy2019 are;

Skinny Tan will increase turnover by 15% to around £11million. I believe this will be easily achievable. Half of the growth should come from the initial Boots stocking order, with the remainder down to the new product launches at the end of the last financial year contributing fully in this financial year. The effect of the Superdrug destocking having stabilised and them having to place more orders to cope with the increased demand, actual sales to customers were up 12%. I expect a more meaningful contribution from international sales as all regions now have the new packaging in place.

Roots Double Effect will increase turnover by at least 300% to £2.7million. This is mainly due to increased brand awareness and the 400% growth in store numbers. In addition, new products will contribute to the growth. I also expect more international sales and increased store numbers in the UK. This would increase the turnover further in my opinion.

Charles and Lee did turnover of around £100,000 in fy2018 the vast majority coming from 30 Myers stores. They are now in over 360 stores, not including an undetermined amount of Priceline stores. This is an increase of over 850% in addition there are international launches planned in South Africa, India and the UK. In addition, they have developed a shaving range of products. Bearing all this in mind I feel that conservatively a 500% increase of turnover to £500,000 should be achievable.

Prolong was achieving sales of around $100,000 a month before battery issues stopped the marketing. If they can relaunch by the start of the second half of FY2019 I believe they can turnover £500,000 in the second half. This is basically the run rate what they were doing and doesn’t take into account any new territories.

I haven’t added anything in my calculations for Headmaster, Stevie K or any other brands. Any turnover from these would be an additional bonus. However, adding all my figures together, I get an expected turnover of £14.7 million, which ties in with the companies own guidance. I feel this is an extremely undemanding number and has the potential to increase significantly.

The profit figure is harder to determine however as it depends on how much they invest for future growth. The company itself expects in excess of £1.6 million and I see no reason why they cannot meet and exceed this.

I firmly believe that the company has had to make some tough decisions which have impacted FY2018 figures, however I also believe that they made the right decisions for the future stability of the company. IDP is now far less reliant on one brand and one retailer. And as such I have every faith in the company being able to deliver strong growth going forwards.

I continue to hold shares in IDP and have indeed topped up since the results.