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Card Factory special under threat

The greetings card retailer suffered a poor second quarter, and doubts are mounting about the security of the special dividend
September 6, 2018

Any optimism generated at the time of Card Factory’s (CARD) upbeat full-year results in April has been erased due to a troubling mix of low consumer confidence and declining like-for-like sales. And as rising costs and an aggressive expansion strategy come to a head, the security of the group's long-standing and much-prized special dividend now appears to be an issue. Despite weakness in the share price already this year, we believe halting special returns or curtailing store openings has the potential to destabilise the stock further.

IC TIP: Sell at 192p
Tip style
Sell
Risk rating
High
Timescale
Short Term
Bull points

New openings
Low rating

Bear points

Reduced special dividend
Like-for-like sales decline
Poor returns on new stores
Weak consumer environment

A squeeze of 0.2 per cent in underlying like-for-like sales during the first half of the 2019 financial year has soured sentiment despite management pointing to a "record sales performance" on Father’s Day, and, at the time of the full-year results in April, "phenomenal" sales performances on Valentine’s and Mother’s Day. Concerns are now mounting about the resilience of day-to-day trading, particularly as store-based sales, which were down 0.7 per cent on a like-for-like basis in the six months, come under increasing pressure.

The weaker consumer environment combined with recent volatile weather patterns have forced management to trim underlying full-year cash profit guidance to between £89m and £91m for the year to the end of January 2019, compared with previous consensus expectations of £93.5m and £94m the previous year. These projections are dependent on performance during the all-important festive period, which leaves noteworthy scope for more pain should conditions deteriorate further.

Traditionally, Card Factory's shares have served as an income play and the forecast yield remains eye-catching. For now, the group believes it can pay a special dividend worth between 5p and 10p this year – but that’s significantly less than the 15p paid in previous years. Confirmation of the exact amount and timing of this return will be given at the half-year results, which are scheduled for 25 September. However, some analysts already fear the worst – ie, the minimum payout of just 5p.

Brokerage Berenberg anticipates the special dividend will land towards the bottom end of this guided range, while Peel Hunt agrees and reckons the special could be “the last for some time”. The assumption being if underlying sales growth fails to find any real momentum, downward pressure on profitability will mean surplus cash is held back for the group to pursue its growth strategy. But that growth strategy has us worried, too. The group opened 25 new sites in the first half alone, and wants to ratchet up to a total of 50 new openings by the year-end, which will take the store estate close to 1,000. While the short-term nature of many of Card Factory's property leases provide it some flexibility, high-street footfall figures – down 0.8 per cent in July – suggest that store expansion could damage profitability. Indeed, even if sales hold up, Berenberg reckons expansion will come at the expense of returns. The broker forecasts that return on invested capital (ROIC) could fall from 17.7 per cent last year to 15.9 per cent in the current financial year.

CARD FACTORY (CARD)   
ORD PRICE:192pMARKET VALUE:£656m
TOUCH:191.8-192.1p12-MONTH HIGH:341pLOW: 175p
FORWARD DIVIDEND YIELD:8.0%**FORWARD PE RATIO:11
NET ASSET VALUE:64p*NET DEBT:74%
Year to 31 JanTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201638282.019.123.5
201739885.019.824.1
201842281.018.924.3
2019**43473.017.214.3
2020**44974.017.315.4
% change+3+1+1+1
Normal market size:1,500   
Beta:0.47   
*Includes intangible assets of £332m, or 97p a share
**Berenberg forecasts, adjusted PTP and EPS figures, includes special dividend of 15p for 2016, 2017, 2018, 5p for forward 2019 and 6p for forward 2020