Card Factory - an undiscovered Zulu?

Epic: CARD - FTSE Small Cap Index - Market Cap £295m

Twitter: @rebelHQ

Below is just some thoughts, it isn't investment advice or incitement to buy in any way, just my views - please do your own thorough research. I’m not an analyst, I’m just a private investor looking after my own money. Nothing I do or say is meant as advice or should be taken as such. Here I publish my ideas and research that I have done and discuss the way I invest.  Anything written here needs to be verified for its accuracy. Assume any stock I write about I likely own, so my views are biased. Inevitably I will get things wrong, ,As the Rag N Boneman said, I am only human after all, so do your own research.  Everyone is responsible for their own decision making and what they buy and sell. Subscribing and reading this article means you accept the above and you take full resposibility for your own actions and decisions. Small Cap stocks can be illiquid and vary hard to sell at times when demand is weak so caution is required.

The only tip you’ll get from me is to wear a hat when it’s raining.

Card Factory – Epic: CARD - FTSE Small Cap Index 88.3p

For a first stock-blog, I thought I would do a little write up regarding a stock which I think could have huge, better than expected recovery in it over the next 6-12 months. I hold the stock so I may not be totally impartial. I love recovery plays, they are often the biggest, fastest rewards in equites if yo can identify them early. These are investments I target and the best recovery plays are very often the most ignored by the fact that people aren’t interested. I target stocks that have potential to double or more in 12 months or less. The best recovery plays at first glance look boring, they look like yesterday's hero or product very often, and that is partly why they get overlooked early on and at lows. The first 10 bagger I ever had outside the tech boom was Hornby. I had read Jim Slater’s “The Zulu Principle” cover to cover, several times and decided to adopt his strategy of investing. I remember investing in Hornby at circa 130p and when I told others, the response I got was 'What? The old model trains?' This never surprised me, after all, how many investors or punters do the deep research to get ahead of the crowd? Most of us glance at shares and if something doesn't grab our interest in 5-10 minutes we move on. What would really grab anybody's attention if, at the back end of the brave new world of the tech boom, where there were 10 baggers everywhere, you suddenly suggest investing in a plastic Flying Scotsman Trains? Well what grabbed my attention was a new board and director buying initially. Bombed out stocks that have had a history of underperforming usually need a new board for things to change, bad directors rarely become good directors. I did some intense research. I found the model train websites and joined them. I spoke to the geeks that loved these things and could talk for hours about them. I asked about Hornby and got the reply 'Akctuuuually, Hornby have got their act together'. I called the shops and asked if certain trains were in stock and noted the waiting lists for certain trains. It transpired that the move to manufacturing in China by the new board had raised the quality by miles and crushed production costs and they were doing similar with their other main product - Scalextric. Shops had waiting lists for products and queues out the door to buy them. While most investors were still looking for the next tech dream when the boom was over, the investors who had been watching this little darling closely cleaned up as it rose in 3 years to over £10 and was paying great divis too. By this time, the press that had largely ignored Hornby in the first 2 years of the recovery, were now all over them and saying 'Buy' at getting on for £9-£10, this said to me it was time to exit! I just about 10 bagged them including the yield they had returned. This whetted my appetite for recovery plays. Card Factory also has nearly everything required to fit the criteria of a Jim Slater Zulu stock and I’ll highlight that at the end. Card Factory is a fully listed Plc Small Cap, it is not AIM.

So, boring is good in my book. Novice investors chase the ‘sizzle’, they love to buy what everyone else is buying, they love to be part of the crowd, but invariably, joining the crowd means you are late to the party. Real value lies in finding the shares that few are interested in because the story looks boring or uninteresting on the face of it. If a share isn’t racing away, what will make it race away? What makes shares race away is usually newsflow. It’s when the general investing community discover a great investment that has been sat under their nose but haven’t been aware of. They were there all the time, they just looked ‘boring’. The “misconception'“ that a company’s market is in decline is good too. If I say to people I like Card Factory I get one of two replies. The first is “aren't greetings cards old hat - who buys them today?” Well akctuuuually (I'm a bit of a Card Factory geek now as you can hear, after all my research), the market is still growing for Card Factory if not for others. I saw this quote recently:

“ the greeting card business is falling by 3% each year. Due to the decline in purchases, departmental stores like CVS and Walmart were left with no choice but to limit their display space for greeting cards.”

Despite postage now at 95p it is still the way we like to send a message for Christmas, Birthdays, Anniversaries, Weddings, Mothers Day etc. If the big stores are reducing their display areas they are competing less with Card Factory. The other reply I get is “It's all going online these days” - Moonpig and Funky Pigeon (F.P owned by WH Smiths) is where people send cards now. So let's test that theory (this may sound boring but that's why so many miss multi-baggers - it gets a lot more exciting when we get further down, honest!). I don't know about other wives but when we are at the garden centre my missus makes a bee-line to the greetings card section and buys a number of cards, often an anniversary card, a birthday card, a deepest sympathy card, not that we have a lot going on but “just in case”. We shopped there yesterday for 2 ferns and some compost and she comes back with this:

5 Cards, 2 pcks of cards and a bill £34 of which £14 were the cards! The card display in the store is 30 feet long, it’s always got people browsing, it is the busiest area in the garden centre even in summer.

In hard times, you might not be able to buy a gift but you can afford the 29p entry level card that Card Factory sell. Card Factory formed in 1997 and their entry level card was 29p, it still is! Card Factory have big ambitions for the website and with their strong cash-flow they have the guns to up their online game and eat into Moonpig in my opinion. The important thing is that Card Factory now have an additional market – gifts!  Stores are being upgraded and when people shop in them there is now a plethora of added gift ideas.  Some of these will start at a pound or less so it’s very easy and tempting to pick up a little something to go with a card.  But the gifts go much higher up the price line such as this £29.99 drinks and chocs hamper.

This means that while the margins on higher price gifts will be a bit lower, the sale price is much higher, meaning greater top and bottom line. Shops need to be a house of temptation.

Who gets a thrill out of getting an online card over the internet? It always seems like an after-thought to me, an “I couldn’t be bothered with you really as a friend but just to show I never forgot you, here’s some picture of a card on your screen and a greeting under it with some cheap generic music”. Receiving a real card is an experience or a '“moment” as the marketing bods like to call it. The reading of the address, the opening of the envelope, the study of the image on the front and the reading of the message inside, the handwriting and the “kisses” are all part of one tangible event or moment that we enjoy. I’ll be a little sexist here and actually say it is more a woman thing but I do find myself saying to the missus ‘have you got a card in the cupboard to send…….” There may be a percentage or so decline in sales of cards each year but there is also a greater decline in the competition falling away.

In 2021, the year Darcy Willson-Rymer joined as the new CEO, Card Factory had sales of £285m. This year, their results will show sales of a record £467m+, well above their 2019 pre-covid high. They intend to get to £600m by 2026. That’s 10% sales growth per annum for the next 3 years approximately.

Moonpig had sales of £368m in 2021 and will have sales of £319m in 2023, the companies are on paths of different directions. Moonpig sales will be below their pre-covid highs till 2025 or later based on current forecasts.

Some of Card Factory's out-performance is due to the comparisons with them being hit by the tail end of lockdown as can be Moonpig's out-performance where people shopped online in lockdown. Comparing to per-Covid highs doesn’t lie though. Covid led to many investors thinking Card Factory would never come back from this hit as we will all shop more online. The internet had jumped 5 years forward in a year, we were told, but this hasn't been the case. Over the last 12 months Moonpig sales have gone from £304m to £319m while Card Factory has gone from £364m sales to £467m+.  With big stores reducing their card display area, Paperchase going bust and Clinton Cards looking wobbly at the best, there’s a lot of high street competition depletion. Do investors see all the issues for other card co’s and think Card Factory is just the same?  If so I think they are greatly mistaken and there is possibly big upside surprise potential. One thing that has become key is that retailers need to be multi channel or omni-channel. Click and collect or click and return play a huge part in keeping returns costs down and drawing customers into stores where they can get a replacement rather than a refund or add to their purchase. Online card sellers don’t have this advantage.

Card Factory floated 9 years ago in June 2014. It doubled in price from £2 to £4 in just over 15 months. Karen Hubbard succeeded Richard Hayes as CEO in Jan 2016 - a disaster. The company under-performed and over 4 years of investor value-destruction the shares dropped to 97p at the end of 2019. A month later Covid erupts, and by March, Card Factory hit 36p from its 400p high a few years before. Karen Hubbard resigned and by the July 2020 interims the co had net debt of £144m ex leases and sales of just £110m in H1, losing 5.2p a share in H1 and a market cap of circa £100m. Card Factory looked like a terminal decline hastened by Covid, they looked sure to need some form of very dilutive funding like so many businesses during COVID with even more debt to mkt cap, and lockdown wasn't over - and no CEO! - Peak gloom!

Enter Darcy Willson-Rymer, new CEO on March 8th 2021. He inherited year end results of a -3.7p loss per share compared to 15.7p EPS the year before, net debt of £145m ex leases and 2.3 times leverage. They had accepted a £56m Covid loan on the understanding that it had to be paid back within a couple of years or have a very dilutive fundraising.

Darcy has a great track record, not only has he been the boss at Starbucks and KFC UK, he was CEO at Clinton Cards for a year in an attempt to rescue them prior to going insolvent and being taken over by American Greetings, great experience. Darcy’s previous CEO job was at Costcutters for 9 years. From my research he seems to have been credited with a lot of Costcutters' success, even with their main food supplier pulling the rug from under their feet and leaving them 24 hours from going under, he managed to do a rapid deal with the Co-Op to supply them, transforming the co’s business model to one data led. He left with sales at a record high and a big jump in profits.  A humble guy, Canadian with 2 kids, he lacks the bulls**t you see in so many CEO’s in my opinion.  In an interview in Sept 2022 he promised a good Christmas – a couple of months later they had two massive raises to guidance. Since taking up his role he has reduced net debt from circa £132m to £46.5m in less than 2 years. Debt has fallen so fast they were not held to doing the £70m refinancing via a share issue and so haven't had to dilute the shares which stand at 344m from 341m in 2017. They are now expected to do 11.2p EPS this year putting them on a PE circa 8. They will start paying a divi as soon as the debt is a little lower as agreed in their refinancing and the Covid loans are paid off in full. The easy route would have been to just do a placing or rights issue, Darcy resisted the temptation to dilute shareholders where many would not have done so.

Darcy has a declared aim to make Card Factory the “Biggest Card Retailer in the World!” and why not, American Greetings in the US isn’t even twice the size of Card Factory now, and in decline.

With sales this year at a record £467m+ it is worth comparing what their past achievements were, which was 20.1p EPS on £398m sales, so with a return to previous margins, if achieved, on these sort of sales,  EPS could easily be 25p+. When they were doing 20p EPS in 2017 the shares were trading £4 compared to the lowly 88p today.  In 2017, operating margins were even higher at 21.5% - that’s double what they were in the last trailing 12 months so still lots of margin recovery to be had.

Down from over 400p to 88p and no dilution in shares

Card Factory have 1026 stores at the interims and are still opening more, and an online presence. They have recently combined their other website for personalised gifts - getpersonal.co.uk with the main website which has been upgraded and has reduced costs. While online sales last year were down 27.6% over 12 months like so many online stores, Card Factory are still up 85.2% over 3 years. Store revenue grew +7.1% on a Like-For-Like (LFL) basis in the last update in Jan, in Nov they had said they were up 6.2%.  Card Factory now have a great online app – it’s well worth downloading it to see the product range and ease of purchase in my opinion. The online shopping site is here:

https://www.cardfactory.co.uk/?opti_ca=13681984962&opti_ag=127145630394&opti_ad=615020105245&opti_key=kwd-317141270&gclid=Cj0KCQjwuLShBhC_ARIsAFod4fJRGNGYGFLkJr9BQxdP2nHuoZ-J2GpGjyLVkqhxTitElcmLejkguqQaAi4lEALw_wcB#

Competitive advantage: Card Factory sell from numerous stores and online and they have the ambition to be a true omni-channel retailer, they have several advantages. Most card sellers in this country buy their cards from the likes of American Greetings etc who supply all the cards and the displays but take around a 40% cut for supplying this and re-filling the displays. Card Factory design all their own cards and produce a minority of products in China, however, they design, print and make most of their products here in the UK, 80% in fact. I like this factor with China getting a bit pushy. Paperchase has recently gone bust (about 100 stores), Clinton Cards has closed nearly 200 stores over the past two years going from 400 to 225 roughly and still closing regularly, 7 Clinton Cards closed in the past two weeks – try searching Google for Clinton Cards under ‘news’. Here’s Clintons website

https://clintonsretail.com/

The site is currently ‘down for maintenance’ in the run up to and all over Easter! you can look at what they have but you can’t buy! Their personalised cards are being subbed out to Moonpig. It looks like Clintons are just getting a referal fee for personalised cards now. Many Card Factory stores seem to be right near a Clintons which may be hurting Clinton Cards. Clintons looks in trouble imo.

Card Factory have been increasing stores and are now trialing London with 3 new stores, plus several stores in Ireland. Card Factory are now selling add on products and pushing these hard like teddy bears, keyrings etc, cheap add ons to sales. The new store designs are attracting greater footfall and sales. They have redesigned stores with a better layout and are scaling these out too. They have also started adding 'click and collect'. The great thing about click and collect isn't the convenience for customers (tho it is great for many to order online from home and just nip in and pick their purchase up while at work the next day) it's the fact it brings people into the stores where they can be tempted to buy other add ons - something the likes of Moonpig don't have being solely online. Recently, Card Factory have increased prices - they have raised the price of some cards by 40% or more and just tweaked up the amount of embellishment on the card so an added cost to production of a penny or two but there hasn't been any knock back by shoppers, which is pretty remarkable. They have retained the 29p entry level cards though.

Clinton Cards

Card Factory

Last July the co agreed it was time for the current CFO, Kris Lee to move on. I think the big growth plans meant he was perhaps at the limit of what he could do. Recently Card Factory announced they had head hunted Matthias Seeger as Chief Financial Officer. Matthias worked for Darcy at Costcutters, Darcy obviously knows him well and wanted him - I much prefer that than getting a CFO in who is an unknown quantity. Matthias is a bigger hitter having been at Proctor and Gamble, Germany for 22 years in finance rolls. They have waited 10 months for Matthias Seeger to take the CFO seat, he joins on May 22.

The Chairman is  Paul Moody who is also Chairman of 4 Imprint Plc which is nice to see as that is another well run company. 

Recently in December Darcy appointed Roger Whiteside as non-exec.  Roger was the Supremo CEO at Greggs Plc at perhaps it’s best performing years and a guy I very much respect. Darcy has surrounded himself with good guys who know their job in my opinion.

The huge cash generation here is what has helped to pay down debt. Card Factory are expected to create free cashflow of £19.8m, £33m and £42m over the next 3 year, this will pay down debt further, pay a divi and increase their new store roll out and expand overseas. At the last trading update in January, Darcey Willson-Rymer said:

"We're pleased and encouraged by the continued strong performance of the business. With delivery of our growth strategy progressing well, it is great to see some of the benefits from this work starting to come through in our financial performance.

I'd like to thank all our colleagues who have supported these changes and worked tirelessly over the important Christmas trading period. There is still more work to be done but we are very excited by the opportunities ahead and have confidence in our Opening Our New Future growth strategy”.

I like investing in stores that are liked by the public and the staff. Greggs, Marks & Spencer, Jet2, Next are all companies I regard as quality. I put Card Factory in the same class. They aren't just the biggest card company in the UK, they are also liked. Recently Card Factory have been voted one of the top retailers to work for and one of the most loved retailers by shoppers.

The new style store (Coventry)

So what is the future? Well we know they can do 20p EPS on a lot lower sales than they are doing today but they were also paying a 9.3p divi on 15p EPS as recently as 2019, they have generated £140m free cash-flow in the past 5 years even through Covid and a further £96m is forecast over the next 3 years. With record sales, if they could get back to the 21.5% margins of 2017 the earnings would be at a big new record highs but that remains to be seen.

Stockopedia gives them some great ratings

They also have some high key metrics

Card Factory boss the high street for cards and have 1020 stores all on very short leases of around 2 years or less and a low 'fit out cost which means if a store is underperforming they can close it and move easily or demand rent reductions. With EPS forecasts for 11.8p EPS for the year about to be reported and 10.5p EPS for 2023 (this year) this looks very conservative PE of 8.3 going fwd imo. Like most brokers have done to many companies, the forecasts have higher interest rates, higher wages and higher corporation tax priced in for the coming year. But Card Factory will likely pay higher interest on much lower debt and any extra tax should be more than offset by 7%+ sales growth. Shipping costs have also plummeted. Their energy is hedged till the end of 2024 and their currency is well hedged too. There will be savings from massively lower shipping costs which are a quarter of what they were a year ago.

Energy has also plummeted. along with gains of higher sales and better performance from new format stores and click and collect, plus sales of add on product, sales in-store and online, all this should help to increase margins going forward,

Online, Cardfactory.co.uk sales were down year-on-year as customers returned to the high street but remained up significantly in comparison to pre-pandemic (+85.9% 3Y LFL). There is also all the weddings that were delayed in lockdown still to go ahead and we have King Charles' coronation and all that balloons and bunting. A PE of 8 seems too cheap on any metric in my opinion. The cash-flow, the rapid debt reduction and the momentum is excellent. For me the share price doesn't come anywhere near to pricing this share correctly especially when you take into account the cash-flow. I feel the market will start to “get it” come the results in April as debt plummets and a divi comes on the horizon.

The bigger picture going forward is international expansion. They already have distribution partners abroad in Australia and elsewhere via Aldi and others and have identified new territories like India and the Middle East.  This is the next big chapter having got the UK going strong and will be expanded on at the forthcoming results I believe. They also have plenty of surpluss warehouse capacity in Bradford to cope.

What are the risk? Well all I see are those that face most co's every day, weakness of material supply, inflation, recession but nothing really singular to this co other than people suddenly deciding to shop massively more online and then they have this base pretty well covered now too in my opinion.    

In mid November the company raised guidance by £7.2m EBITDA

“As a result of trading to date, the Board now believes that EBITDA for FY23 will be at least £96.0m versus current consensus of £88.8m.  This EBITDA would approximate to PBT of £37.5m.”

In January the company raised guidance for EBITDA again by over £9m to £106m, saying “trading was strong with good momentum” which amounts to roughly 20% upgrade in a couple of months. Raising guidance twice in two months like that confirms the momentum in my opinion.

Current forecasts are for £467m Sales this year (2023) and 11.2p EPS, roughly 0.9p of which will be a one-off benefits due to the release of CJRS provision and deferred fee accrual release associated with prior refinancing package.   For the coming year (2024) sales are forecast to rise to £490m and EPS of 10.5p. Forecasts look conservative imo, seeing sales for this year are up over £100m. There will be higher corporation tax this year and higher interest rates but debt will have fallen significantly. Operating margins have improved from 8.67% in 2022 to 11.6% for the trailing 12 months so I expect full year margins next year to be a lot improved. 10p eps would be similar to where they floated in 2014 and traded @ 220p a share.

Free cashflow was 31p a share in 2022. Book value per share is 69.2p according to Stockopedia.

So £600m sales targeted by 2026 and moving into a gifting market which is over 3 times the size of greetings cards, I don’t believe Card Factory’s market is declining. They have momentum with earnings, cash and growth of sales and the potential to surprise to the upside after two recent large upgrades in my opinion. On top of this their competition is falling to the wayside on many fronts.

As promised above, for Jim Slater Zulu style stock hunters, here’s how CARD match up at the moment

MANDATORY

1. Five Year Record (5 years positive earnings growth - X- But 20 years of sales growth up to the pandemic and a strong earnings growth record.
2. Low PEG Factor (PEG below 1 - ie 10% eps growth on a PE of 10 or less) - Tick
3. Optimistic Chairman's Statement - Tick
4. Strong Financial Position - Based on cashflow and plummeting debt - Tick
5. Competitive Advantage - (they print their own cards for higher margins and are both instore and online) - Tick

IMPORTANT

6. Something New - a new board and now selling other gifts plus a big international expansion - Tick
7. Small Market Capitalisation (a small cap stock - anything in the FTSE250 or above is out) - Tick
8. Relative Strength (as in the share price movement compared to the FTSE All Share Index) - Tick

DESIREABLE

9. Dividend Yield - coming soon - Half Tick
10. Reasonable Asset Position - Tick
11. Management Shareholding - Tick

When it comes to recovery plays I have another ‘Mandatory’ requirement and that is “board changes’’. Card Factory has that too.

Card Factory just lack the 5 year earnings growth record to be a true Zulu, but then what company has that today after Covid? They did have 20 years growth up until Covid. Investors who follow the Zulu Principle will know how fast these stocks can rise as earnings grow and the PE expands to price in genuine growth. Rare to find a “so close to full Zulu” stock trading on a PE as low as 8 or less when they usually trade on much higher ratings so I am hoping the low PEG, the growth rate and the PE expansion will make these another multibagger recovery play. Not so boring as you might have thought?

How long can this leading reatailer, growing at such a pace, generating so much cash and likely to reinstate a decent div from next year, continue to trade on a PE as low as 8 when 6 years ago it was nearer to 20?

Card Factory year end results will be published on April 25^th

There is a live webcast of the analyst meeting with phone in at 10am same day - register here:

https://storm-virtual-uk.zoom.us/webinar/register/WN_QCORwrDbTRyZWK9dW1EEmQ

Other reading:

Darcy Willson-Rymer big interview: Costcutter’s ultimate survivor

https://www.thegrocer.co.uk/big-interview/darcy-willson-rymer-big-interview-costcutters-ultimate-survivor/601599.article

Card Factory's chief executive reveals his biggest fear as the retail giant celebrates 25 years

https://www.yorkshirepost.co.uk/business/card-factorys-chief-executive-reveals-his-biggest-fear-as-the-retail-giant-celebrates-25-years-3905096

Company investor page

https://www.cardfactoryinvestors.com/investors

Remember this is not investment advice, it is just my thoughts as to why I like Card Factory and why I hold them. Do your research and make your own conclusions and trading decisions and remember, this isn’t a tip or advice. I could be completely deluded and wrong.

Richard Crow aka Cockney Rebel.