Promotional swag – a surprising source of profitable growth

This week’s grizzly profit warning from Sir Martin Sorrell’s S4 Capital (SFOR)Follow | SFOR will have sent a shiver through the advertising industry. True, some of S4’s problems are self-inflicted, not least the accumulation of a slightly troubling debt pile as the former WPP boss builds his new empire. 

But others are undoubtedly related to weakness in the global economy which has seen ad budgets scaled back, compounding the well documented chaos in digital ad markets sparked by squabbles among the social media giants that dominate the online ads market. S4’s focus on digital advertising – and technology clients - may make sound like a sensible approach for a marketing agency in the modern world, but it also leaves it at the whims of big tech.

One area of the marketing industry seems to be holding up remarkably well despite the deteriorating economic backdrop, though: promotional goods. And that’s proving very good news for shareholders in a trio of London-listed companies that help companies put their logos on corporate ‘swag’.

Largest among them is 4imprint (FOUR)Follow | FOUR, which after a record 2022 said in May that order intake in the first four months of 2023 was up 22%. A quick look at its share price since it listed in 2003 tells the story of just how resilient the business is, delivering a 10,000%+ total return as it’s grown sales to over a billion dollars a year.

Despite that, 4imprint still only controls around 3-4% of the $23.6bn market for promotional products, leaving it plenty of room for further growth. And such a fragmented market also leaves plenty of room for other companies to prosper, as demonstrated this week in updates from smaller peers Pebble Group (PEBB)Follow | PEBB and Altitude (ALT)Follow | ALT, valued at £147m and £28m respectively in contrast to 4imprints £1.3bn market cap.

But, as their recent news demonstrates, both are tapped into the same industry strength that’s seen 4imprint’s shares rise so spectacularly over the last two decades. Pebble said its sales of promotional items had continued to rise in its first half, impressive given the strong 2022 comparable after a significant bounce back in post-covid sales in the first half of last year. 

Perhaps more interesting for would-be investors is the progress of its Facilisgroup e-commerce platform, which makes it ever easier for its distributors to order that corporate swag and get it to customers. It grew its sales by a fifth, and with high EBITDA margins already contribute a meaningful proportion of profit to the group. 

Meanwhile, smaller Altitude grew its revenues by 57% to £18.8m in its full year to March 2023, well ahead of broker Zeus’s expectations. Like Pebble, it still derives the bulk of its sales from the ‘merchanting’ of promotional items via its marketplace, but it too is seeing growth of its technology-driven services business, which saw sales climb 35.1% to £8.5m as more distributors place more orders through its platform. 

While promotional goods remain in high demand, it’s the management of the supply chain that offers most potential for profit growth – in Altitude’s case, its software-as-a-service revenues come at a 90.6% gross margin, and with high operational gearing as adding new partners to the platform comes at no extra cost. There are 23,000 promotional distributors in the US, plenty of upside fr0m the current 2,214 is has signed up.

As broker Zeus points out, it’s already increased its FY24 and FY25 profits forecasts three times since last November and is on track to increase adjusted EBITDA by 14% this year to £2.2m. Given the steady growth of the promotional products industry, and opportunities to move into adjacent areas like campus shops – think Harvard sweatshirts – and it looks like it should be able to keep turning swag into profit swagger.