Card Factory is a cash factory

The market's Brexit-related concerns about Card Factory were exacerbated by weak trading in August and September as well as nervousness about the impact of the national living wage. However, there are signs that things could be coming good in time for the all important Christmas trading period, with the group recently saying it has seen a sales pick-up in October. This chimes with encouraging data from the Office for National Statistics (ONS) last week. So we don't feel it need be a source of too much consternation that the group recently reported a disappointing 4.4 per cent third-quarter sales rise, which implies a marginal drop in like-for-like sales over the period.

What's more, Card Factory looks relatively well placed to weather any industry hardship. The company is unique in operating a so-called "vertically integrated" model. This means that as well as selling cards, it designs them, prints them, warehouses them and distributes them to its shops. Combined with the group's scale, this model has driven down costs, resulting in enviable underlying operating margins of 22.4 per cent last year. And Card Factory should enjoy further scale benefits as it grows, given its infrastructure has the capacity to handle about 400m cards a year compared with around 250m at present. And having such close control of its product means the group is able to keep ranges more frequently refreshed than rivals, which is important as customers often make multiple store visits to buy cards for similar occasions.

Card Factory's model should also give the group more scope to mitigate anticipated raw material price rises caused by sterling's weakness once its current hedges disappear next year. There are hopes, too, that recently appointed chief executive Karen Hubbard will bring her experience of driving efficiencies to bear, which she honed during her time at Asda and B&M.

Indeed, the flexibility and resilience of Card Factory's business model means it looks well placed to move into gaps in the market left by struggling rivals. From this perspective, it is interesting that broker Peel Hunt has recently highlighted that Companies House filings show American Greetings, the US owner of UK-based Clintons, scaled back the struggling UK chain's estate by 19 stores to 393 in the six months to July and has appointed Knight Frank to review the store portfolio.

By contrast, Card Factory's main growth driver continues to be estate expansion. During the first nine months of the financial year it opened 46 new stores, leaving it on track to deliver 50 in the current financial year. The new store opening rate is expected to remain around this level, building towards a total estate size of roughly 1,200 stores in the long term, compared with the current 860.

Card Factory remains extremely cash-generative thanks to limited working capital and capital expenditure requirements. Importantly, management is inclined to return any surplus funds to shareholders, having established a track record for this over the past two years (last month the company went ex-dividend on its most recent 15p special payout announced at the half-year stage). The forecasts in our table below assume special dividend payouts continue next year. Investors should be encouraged by the fact the board continues to target dividend cover of between two and three times on an annual basis. What's more, analysts at Liberum estimate that the group's current cash flow profile could support a total dividend yield of 6-7 per cent in the longer term, too.