Card Factory results update May 3rd 2023

A Brief Résumé

This 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, 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 responsibility for your own actions and decisions. Small Cap stocks can be illiquid and very hard to sell at times when demand is weak so caution is required.

Below is a résumé of the points I took away from this weeks results. I’ve posted links to the two presentations at the end where you can really get a feel for the business and the directors.

Well a superb set of results this week wasn’t greeted with the share price reaction I thought they deserved.  Understandable in a way as the shares have doubled in just over 5 months since the first trading upgrade, 35% of that in the last month.  Rallies like this, draw in traders who really aren’t interested in the fundamentals of the business, just how big the positive surprise will be on the results.  As the results came in as expected (tho eps still beat forecasts by nearly 20% coming in at 12.8p diluted compared to a forecast of around 10.8p) the traders sold to move on.  However, a read of the results and a watch of both the results presentation told a lot and increased my confidence even more.

One of the things I have learned is this management are keen to under-promise and over-deliver. In Jan 22 the co had to warn they were a bit behind forecasts due to rising cost pressures post Covid.  The shares took a 25% hit but the co did say they expected to recover this situation going fwd.  Despite Ukraine then kicking off, Card Factory did recover the situation and by October they put out the first of 3 recent big earnings upgrades of around 8-9% each in 6 months, the last of which would have come with the results had they not put it out a week before along with the auditor’s delay for a week, to steady investor nerves.

So onto the results:

Net debt excluding leases is down to £57.2m from £74.2m last year and down circa £86m over 3 years.

Including leases debt is down to £162.5m from £194m

Highlights:

The full results are there for everyone to read but my highlights were as follows:

Revenue growth in Everyday Cards were driven by range of methods including a targeted pricing strategy with a permanent 3 for 2 on general card range introduced, delivering +20% LFL revenue growth and +48% LFL volume growth in this category.  They also had an entire review of the Everyday Cards range with new ranges developed and expanded diversity across all card ranges are fully inclusive.

A trial of click and collect in 85 stores was clearly successful and produced a 7% uplift in basket sizes on online orders.  The company has now rolled this out across all 1032 stores to take full advantage.  Store LFL was up 7.6% with Cards and Gifts now making up a 47%/53% split.  Targeted price increases at various price points has helped increase sales.  A new store format has been designed and will be rolled out as stores change leases or are due refurbs.  Part of this is to have gifts in the middle of the store and cards around the outside so that the right gifts are in the perfect place to accompany any card purchase. This will prioritise gifts more, it is ‘capital lite’ and will be rolled out to 50 stores this year. 750 stores will in the meantime this year, at little cost, see a revise store spacing improvement that will also improve sales after tests, with pay back within the year. New analysis shows that the gifting market opportunity for Card Factory is now £13.4bn in the UK. 17% of people that buy cards buy a gift now.

 At the moment, the new click and collect is a 3-5 day service.  As the company moves forward they hope to reduce this to next day or even same day as the second phase of their ERP software upgrade comes online in H1 2024 and will let them see all stock, everywhere including in-store.. This would then allow them to do ‘picking’ for click and collect within store.  This will be a huge advantage they have over all competitors going forward, especially Moonpig and Funky Pigeon. It also means Card Factory are able to cut out Royal Mail.  With their vertical integrated business where they print their own cards they will have a huge cost advantage over the competition.  Not only will they be able to provide even lower prices but it attracts people into stores where they can be tempted to buy further gifts.

 Less than 1% of stores make a loss today, they plan to add another 90 stores by 2027, with store sales up to £520m.  Cardfactory.co.uk sales fell -18.8% y-o-y, due to customers returning to the high street and the impact of Royal Mail strikes during the Christmas, but remained up significantly in comparison to pre-pandemic +86.4% 3Y LFL. This is very similar to Moonpig and Funky Pigeon.  Cardfactory.co.uk and gettingpersonal.co.uk have both been put onto the new, same platform and should benefit going forward.  Developing a database to drive people to the website is a priority and the company is developing ways to boost the database.

Rents continue to fall.  Energy is hedged out to Sept 2024 at rates similar to today, but likely to see rises there after.  At current rates that will add £4-5m to costs going into £2025.  Currency is also well hedged.  Interest rates are likely to rise in the coming year but debt will be substantially lower.  Offset against this should be a substantial fall in shipping and pulp prices, aided by a stronger £GB

Partnerships both here and abroad are their third leg of the growth strategy going fwd.  Already supplying the Reject Shop in Australia, they have acquired SA Greetings as announced shortly after the results.  This will be earnings enhancing this year. They have also done a deal with Liwa Trading Enterprises, who will act as exclusive franchise partner in the Middle East, to open circa. 36 Card Factory branded stores over the next 5 years.  Liwa are paying for the stores, fit out and running so little to no costs for Card Factory.  Circa 7 stores will be rolled out per year. Darcy Wilson-Rymer CEO has 20 years experience in the franchise business model.

The Capital Markets presentation is well worth watching (2 hours) and it spells out all what they are doing for future growth and their target to grow sales to £650m by 2027 and PBT margins of 14%. I personally think again the company is guiding at a level where it will over-deliver.  One point I picked up on was they have now introduced a mystery shopper (which I know Paul Scott likes).  A really interesting anecdote of Darcy’s was the Chocolate Heart Mothers Day Card story – you’ll have to watch it to hear it.  They are on a big cultural change with staff, making sure they focus on the customer and new training. Pay and benefit improvements has reduced store manager churn from 9% to 3%. They plan to improve staff pay and benefits more too.  This sounds like a leaf out of Roger Whiteside’s (Non Exec) book when he was CEO at Greggs – happy staff bring greater returns.  Wifi is being introduced in all stores and wireless point of sale, for staff to take payment on the shop floor and reduce queues. There’s loads more in it Capital Day Presentation to whet your appetite so well worth watching.

It is worth noting that brokers have upgraded 2024 and 2025 forecasts this week.  Stockopedia suggests £490m sales now, up from £485m, Sharepad suggests sales of £495m for this year.  EPS forecasts are now 11.1p (2024) and 12.6p (2025) from Stockopedia, Sharepad have 10.8p and 12.2p.

Brokers are forecasting dividends here out now. Stockopedia showing the higher of the two with 3.68p for 2024 and 4.66p for 2025 so roughly 3.5% yield rising to 4.5% yield going fwd over the next 2 years. This company has a past record of paying special dividends too with the high cash generation.

The last two columns are the 2024 and 2025 estimates from Stockopedia.

£650m sales and PBT margins of 14% would mean record EPS for Card Factory, they used to trade at £4 a share at their peak.  I actually think they could achieve greater sales and margins so to use a broker phrase for me the risk looks to be to the upside. There’s been 9.5% more customer visits to Card Factory in the last year compared to a 1% rise in the market and they are visiting more often and spending more according to Kantar. They are also ranked No.1 for prices and No.1 for value for money.

The results and Capital Day presentations can be watched here.  https://www.cardfactoryinvestors.com/investors/reports-and-presentations/year/2023

You can really get a picture of what is going on and the pace by watching these presentations. After watching these and seeing the recent early broker upward adjustments I feel even more confident these are a Zulu in the making, a divi would be another of Jim Slaters positive attributes.  I expect broker forecasts to continue to move up through the year.  All of the management come across very much on their game and driven in the Capital Day presentation. Both presentations are well worth watching to brighten up a wet and grey bank holiday.  With the low PE, operating margins of near 14% over the past year, increased sales and huge cash generation along with what looks like a very decent yield going forward that’s just what makes a potential Zulu into a real Zulu.  With their new online ability and low costs they can become a disruptor in the online space too and add new sales from stores into the bargain. Remember these are fully listed and not Aim

Darcy’s former CFO at Costcutters, Matthias Seeger, is expected to join the Company on 22 May 2023 and means Card Factory will have a CFO with big international experience in place for the increased international expansion.

As ever this is all just my opinion and thoughts, it isn’t a sales pitch, just what I find interesting and what I liked in the results and presentations.  I could be completely deluded!  Do your own research as always and don’t take my word for it and you can feel more comfortable about whether this company is of interest to you.

Richard Crow aka Cockney Rebel.