Card Factory (CARD) seems to have lost many of its historic charms as an investment. Turn back the clock a few years and the greetings card maker and retailer could claim a decent investment case. Its end market had historically been resilient to recession, while its manufacturing base and growing store network provided a competitive edge over struggling competition. Another more enduring plus has been the growth of partnerships with supermarkets without detracting from own-store trade. However, the company has not been living up to this apparent promise. Despite assurances from management as recently as last September that the underlying card market was resilient, the company appears to be on a slow slide downward. Earlier this month it delivered the triple-whammy of a profit warning, suspension of special dividend payments and a review of the basic payout. We think it is time to get out.
Review of dividend
Forecast downgrades
Cost pressures
Declining like-for-like sales
Strategy review
Supermarket partnerships
Card Factory has been attempting to restore growth through network expansion, opening 47 net new stores in the year-to-date. But with like-for-likes sales in decline, this has not had the positive effect the company had hoped for. Indeed, earnings have been dropping since the company's financial year to the end of January 2017 (see table) with the trend forecast to continue into the foreseeable future. Worse still, as our graph shows, earnings forecasts have been the subject of persistent downgrades due to repeated disappointments.
The wider retail environment has grown uglier, with footfall dropping at the same time as rises in Card Factory’s manufacturing input costs, due in part to sterling weakness, and in the wages of in-store staff (18.5 per cent of last year’s sales) due to increases in the national living wage. Card Factory has done an admirable job of stripping out inefficiencies and increasing average transaction value to slow the decline and support profitability. However, in a recent trading update management warned that the company was running out of road for improvements. The need to review the dividend policy in light of future expected cash flows was a particular blow given that the income offered by the shares was previously a major draw.
The company now seems resigned to the trends of rising costs and declining footfall continuing in the new financial year, and with little fat left to cut has started a strategic review, the results of which will be presented with full-year results on 27 April. While the board is reportedly “confident” its review will “yield a number of attractive medium-term growth opportunities across both new and existing channels”, a large cost base creates the set-up for further disappointments.
| Card Factory (CARD) | |||||
| ORD PRICE: | 96.3p | MARKET VALUE: | £329m | ||
| TOUCH: | 96.3-96.4p | 12-MONTH HIGH: | 210p | LOW: | 91.2p |
| FORWARD DIVIDEND YIELD: | 6.2% | FORWARD PE RATIO: | 7 | ||
| NET ASSET VALUE: | 65.0p* | NET DEBT: | 143%*** | ||
| Year to 31 Jan | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) | |
| 2017 | 398 | 85.1 | 19.5 | 9.10 | |
| 2018 | 422 | 80.5 | 19.0 | 9.40 | |
| 2019 | 436 | 74.6 | 17.6 | 9.40 | |
| 2020** | 448 | 66.9 | 15.7 | 9.40 | |
| 2021** | 453 | 56.3 | 13.2 | 6.00 | |
| % change | +1 | -16 | -16 | -36 | |
| Normal market size: | 10,000 | ||||
| Beta: | 0.92 | ||||
| *Includes intangible assets of £321m, or 94.1p a share | |||||
| **Peel Hunt forecasts, adjusted PTP and EPS figures | |||||
| *** Includes lease liabilities of £147m | |||||
