Members of Small Caps Live will be aware that Ultimate Products is a top 5 holding for me. Why am I sticking with it after all the disappointments?

Brief History

Ultimate Products was founded in 1997 as a close-out business, buying up surplus / distressed stock and selling it for a profit, mostly to the discount channel. They progressed to sourcing some stock directly from China and in 2009 bought a couple of distressed brands and later licensed a couple of others.

The company listed on the UK stock market in March 2017 after a strong run of results as a private company. Buoyant public markets saw the share price rise from 128p to a peak of around 220p before being hit by the first profits warning that September, hitting lows below 30p the following year before recovering.

Despite initial concerns during covid, the company did well as they successfully navigated supply chain difficulties, their stockists remained open, and consumers went on a spending spree for homewares. This strong run was extended by the air-fryer craze and in July 2021 they bought the Salter brand (previously licensed), 50% funded by a placing at 210p.

A tweak to the company name and the stepping back of one of the founders marked progress in the transition from a sourcing company to a brand owner, however they then started a long run of missing guidance, for example, in August 2024 they published consensus of 15p EPS for FY 2025 whereas current consensus is 5.2p for FY 2026. Accordingly the share price is back below 50p.

Transformation

Despite the share price languishing at a quarter the level of nine years ago, the company has undergone a major transformation:

• Exposure to discounters has reduced significantly, with revenue share down from around 60% to 30%. This has been made up by increased sales to supermarkets (12% to 30%) and online (4% to 20%), although H1 2026 did show some reversal in these trends.
• The lumpy third-party clearance business has reduced from 30% to virtually zero, with revenue from brands they own up from under 50% to around 90%.
• UK consumer exposure has reduced from 70% to 60% due to growth in Europe which is expected to continue.
• The acquisition of Salter in particular was significantly funded by “free money” in the form of share issuance at a much higher price that has since been bought back more cheaply.
• Investment in the graduate scheme and automation has significantly upskilled the workforce and increased scalability.

Recent developments

After a run of back to back profits warnings, the CEO (and joint founder) Andrew Gossage announced an increased focus on marketing, backed up a strengthening of the operating board, funded by cost savings elsewhere. However, the current financial year apparently started very badly when the company announced H1 adjusted EBITDA of just £5.0m in a February trading update. With a typical H1 weighting of 60%+ on this metric, that would require a completely unprecedented H1/H2 split to reach full year forecasts of £9.9m, yet guidance to brokers was retained, apparently setting them up for yet another profits warning later in the year.

However, with the H1 results came the news that there was a one-off, yet included within the underlying figures, charge of £430k for the “reorganisation of the commercial function”. Around the same time contributors to Small Caps Live were reporting increased listings across multiple retailers. While meeting the forecasts without reclassifying the £430k as exceptional still looked like a stretch, not having those costs repeat in H2 made it possible. Last week they reported Q3 revenue flat year on year, which they believe is enough to meet forecasts.

Business Momentum Building

There is significant evidence of momentum building:

• Compared to their recent history, simply having three trading updates in a row without a profits warning constitutes positive momentum.
• The withdrawal from the “close-out” market was a headwind both in revenues and margins that cannot repeat, and masks core proprietary brand sales up 9% YoY in Q3, which has strong potential to compound.
• Full year revenue was £150.1m in FY 7/2025 and forecast to be £145.0m this year / £148.0m next. If they simply continue to trade flat on FY 2025 then they will beat FY 2027 forecasts. With incremental margins likely to be above 20% the effect on profits would be significant, even for a modest beat.
• FY 2027 revenue forecasts were already raised last week.
• Two directors have announced share purchases. Although the CFO was contractually obliged to, he had somehow managed to hold off until this latest update.
• Significant numbers of shares have been bought back. Although in retrospect they mostly overpaid, this stands to enhance EPS once profits recover.
• Historically trading has been very difficult to forecast, but once momentum starts building sales accelerate longer than either independent analysis or management expect.

Change of CEO

A complication is the change of CEO announced last week. There is evidence this had been planned for some time (earlier strengthening senior management below board level, previous talk of an FMCG-like approach to the market) as well as the claim this was after “a thorough search process”. It seems clear enough that outgoing CEO Andrew Gossage has not been sacked given he’s staying until late October and later returning as a NED, though perhaps the pressure of multiple profit warnings has been wearing as he will be taking a sabbatical until May 2027. The hope would be that Andrew Gossage has chosen a positive moment to leave and a small beat will be reported by October along with good progress on the new ERP system.

The choice of Simon Harrison as new CEO, or rather his choice to join Ultimate Products from a much larger company is more of a mystery. Princes Group announced his departure immediately after their results / trading update whereas Ultimate announced his joining immediately before, suggesting more reticence on Princes’s part, and their share price fell materially on his departure, whereas Ultimate’s initially rose on the news. However his FMCG experience clearly fits with the strategy.

It is often said that new management like to “kitchen sink” by taking a more conservative view of accounts, writing down any underperforming business units, and taking the hit early for any required restructuring. While I wouldn’t want to be the “last in” on Ultimate’s Graduate Scheme right now (or indeed be a recent graduate at-all), it seems reasonable to assume Harrison has already taken a quick look at the state of the business and is happy with forecasts, and indeed perhaps discouraged any hasty upgrades last week. While little that happens in the first 1-2 years will be down to the new CEO, nobody wants to join a company and immediately issue a profits warning. What I would predict is a hefty management incentive package, the terms of which will be quite instructive as to his perception of the potential.

Valuation

Current consensus is for 5.2p EPS rising to 7.1p for FY 7/2027. I believe these forecasts are conservative, more than factoring in the subdued consumer environment in the UK and much of Europe, the long-standing closure of the Suez Canal to container shipping, and inflationary pressure in China from elevated oil prices. My thesis is that initiatives already in place will lead to significant high incremental margin growth over several years, which will in turn improve the valuation multiple. If some of the trading headwinds abate even temporarily and UK stock market conditions improve, visibility of a 10p EPS assigned a rating of 15x seems more than achievable on a two year timescale. On the other hand, downside appears limited with competitors such as RKW already struggling and at risk of going out of business if current conditions worsen, which would transform Ultimate’s competitive situation.

Share Price Momentum

While the strong initial share price reaction to the recruitment of an FMCG heavyweight suggested momentum had turned, that quickly gave way to selling. I believe this may be capitulation amongst long-suffering investors that nonetheless rated Andrew Gossage and for whom his departure is the final straw. I believe the next major move will be upwards and while some may wish to wait for a decisive turn, there is a history of quite sudden price movements.