Card Factory Investment Analysis: Is This FTSE 250 Stock a Bargain?

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Please note, these notes are formed from my own opinions, and your own viewpoint may differ. Card Factory share price was correct at time of writing.

Card Factory Stock Ticker: LON:CARD

Card Factory Company Activities: Card Factory are a vertically integrated greetings and special occasions card retailer. It trades mainly via a widespread network of physical, bricks and mortar shops but also increasingly online.

Brand Names Traded As: Card Factory is the main brand, of which their website is the same name. Personalised cards and gifts are sold on another website, Getting Personal.

Card Factory Position In Market: As far as greeting cards go, Card Factory are the undisputed market leaders. A broad estimate is that they account for 20% of the greeting card market, made possible by being the cost leader. The same cannot be said for their personalised gift segment which is behind the more established Moonpig.

Who are their competiton? Several card competitors have seen difficulties in recent years, perhaps brought on by Card Factory. Clinton Cards and Paperchase are among those who have sought to restructure their leases.

Recent Card Factory Trading Updates: 9th of January 2020 was the latest Card Factory update, which slipped in a profit warning on reduced footfall. H2 trading must have been difficult, because like-for-like sales slipped by 0.6%, having being ahead at the half-way point.

Card Factory Broker Updates: No broker updates available on Research Tree.

Card Factory CEO and Background: Karen Hubbard. Joined Card Factory in 2016, prior to this she was Chief Operating Officer of B&M Retail.

Card Factory CFO and Background: Kris Lee, joined in 2017. Previously with Edinburgh Woolen Mill and a raft of other companies.

Card Factory Salaries and details of options: Base salary of CEO, £486,127; CFO £327,726. Maximum bonuses of up to 125% based on a stretch EBITDA target (80% of bonus) and 20% on strategic objectives. Discretionary award of restricted shares possible which can be at nil cost, which must be held for 5 years. Notable that neither CEO/CFO meet the shareholding requirement despite being in post for some time and have only made small purchases.

CARD FACTORY FUNDAMENTALS:

Recent Card Factory Company Trading: The like-for-like results were ahead at half-way but behind at the trading update, so we can presume that the second half was poor. The trading update alluded to cost headwinds biting this year and that the scope for operational efficiencies were running out, and an estimate of £5m-£10m was estimated. For the time being it seems that profits will reduce, and this was summed up in the recent profit warning.

Card Factory Balance Sheet: Net debt has been creeping up here as the strategy of returning cash to holders as well as opening more stores has taken its toll. Debts comprise two parts. The bank debt was £141.3m at the interim results (which may be worse now). There appears to be some headroom as their facility was for £200m. The rate paid was 1.4% + LIBOR, which is cheap enough, but the rate varies with leverage and are subject to covenants.

With so many stores, lease liabilities are a valid topic and IFRS changes means that outstanding liabilities also appear as debt on the balance sheet. Liabilities of £151.2m appear in the interim report. Rents paid in the past year accounted for £42.6m and so it seems the average lease is not long.

The balance sheet is weaker than many others. The company (prior to IFRS) is not asset heavy. Its plant and equipment are heavily depreciated, perhaps indicating that they may be older. The current ratio also features more current liabilities than current assets, but this is more acceptable for this type of business. Card Factory turn over their inventory many times a year and customers invariably pay up front in cash.

Card Factory Distributions to shareholders: Card Factory have had a progressive dividend strategy, which has increased dividends every year for the past five years and paid out a special dividend as surplus cash. This seems to be under threat as reduced profits and reduced headroom bite. A strategic review was mentioned in the last update and monies may need to be conserved for investment into longer term projects.

CARD FACTORY QUICK SWOT ANALYSIS:

Card Factory Strengths: Card Factory are the market leader when it comes to discounted cards. Their vertically integrated model means that they control every aspect of the card from design to delivery, and have a proven price advantage over other producers. Despite selling at cheaper prices, their margins are admirable. Their number of stores far outweighs competitors, and their coverage of the whole of the UK is almost complete.

Card Factory Opportunities: A new wave of opportunities has hit: the Card Factory website is due a refresh which will allow collecting at store. The personalised gift segment has potential for a lot of growth. Further trouble for competitors seems quite likely, which will solidify Card Factory’s position. There has also been an experimentation in sales channels, with partnerships with supermarkets and a venture into Australia. The very large network of stores offers potential for other collection services such as Amazon.

Card Factory Weaknesses: Management have been rather complacent, and the core offering is much unchanged over the past two decades, with cash being given back to shareholders instead of investing for the future. Their online offering is weak and the personalised section of the business has not performed well allowing others to take a lead in this segment. Card Factory are squarely perceived as a value brand.

Card Factory Threats: Card Factory are exposed to the fortunes of the High Street, which is throwing up some harsh headwinds, the most notable of which is the National Living Wage increase. With wages increasing year-on-year this puts pressure on to increase sales. On a smaller scale, greetings cards offer few barriers to competition and alternatives are available everywhere. Further into the future we may see other factors such as 3D printing eating into the market, and it may even be possible that either greeting cards demand declines or a viable electronic alternative takes its place.

CARD FACTORY TECHNICALS

Card Factory Share Price and movement: The Card Factory share price performed well during in previous years, and it topped 300p last in 2017, although this region seemed to be an area of heavy resistance. Since 2017 the market seems to have lost confidence in Card Factory. The share price seen recently of 75p is a low and can be seen to be a falling knife.

Card Factory Shares outstanding/free float: 341.55m shares outstanding, 281.65m free float (Yahoo Finance)

Card Factory Recent Director trades: CEO Karen Hubbard picked up 25,000 shares in January after the profit warning.

Card Factory ADVFN Chat/LSE Share Chat Sentiment: Quite well followed, sentiment is mixed.

Card Factory Feelings: This seems to be finely poised. Card Factory seem to be playing catch-up at the moment, releasing a new version of their website and exploring other avenues. This should have been done a few years back in truth, as the retail model is showing signs of coming close to maturity. The company are aiming for 1,200 stores so there is only a few years of growth left before this is attained.

The scale of profits here can be seen with their net profit figures. Cost headwinds such as wages and reduced footfall impact the bottom line directly. Assuming a profit of £45m in the next year, that equates to roughly each store contributing £45,000 net. This assumes that all central costs are split evenly and there are no more efficiencies to be had.

Any further reductions in footfall will really begin to hurt, because wages and property costs remain the same. These comprised over a quarter of all cost of sales. There is also an unanswered question around the coronavirus risk. Whilst greetings cards are made and printed in the UK, other ancillary items (usually small gifts) are sourced from the Far East.

The uncomfortable truth is that few retail shares appear to be having a good time of it, the main outlier being Next. At present, buying into Card Factory represents buying into a business where the trend is downward, which may be uncomfortable. To compensate for this, the shares appear fairly cheap (although cheap can be expensive when profits are falling), and the business is great at generating cash and has more or less maintained its very high margins despite increasing the number of shops.

The catalysts for growth may come later on. But this may come at a cost which makes the debt situation worse. Upgrading their websites is one thing, but a campaign to dominate the custom card market may prove to be quite expensive. So it could quite conceivably be the case that the next update includes bad news as well.

I am not long here currently, but at 70p the Card Factory share price may be too good to turn down. Despite the possibility of trouble ahead if trade does not pick up I feel it will at least outlast some of its direct competition and other stores such as The Works.

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