Card Factory: Many Happy Returns?

14th Jun '23 by Mark Simpson

7 comments 1826 reads

In this week's Stockopedia Strategy Map article, Ed wrote about Trending Value, stocks that have both high Value and Momentum Ranks. As a follow-up, I am looking at one of the companies that features on Ed's Low P/E, High Relative Strength screen: Card Factory (LON:CARD)

Summary

Card Factory is a high street retailer of cards and gift accessories through over a thousand UK stores and almost another thousand partner locations in the UK and Australia. It also has an online presence, although these sales represent just 3.7% of revenue.
The Stockopedia algorithms rate the company a SuperStock. High Value and Momentum Ranks, combined with an above-average Quality Rank, means that its overall StockRank is an impressive 99
Although earnings are forecast to decline slightly, their forward P/E is just 8, and their most recent Price to Free Cash Flow multiple was a very low 3.9.
However, most of the Free Cash Flow appears to be generated by changes in Working Capital (including re-timing of VAT payments) and lease accounting, meaning that the underlying free cash flow seems unimpressive over the past few years.
In addition, the balance sheet looks particularly weak with a current ratio of just 0.44, which is low, even for a retailer that pays suppliers months after their retail takings. The increasingly negative working capital leaves the company exposed to any downturn in trading.
With negative net tangible assets, there is no downside protection if things go wrong.
However, recent trading is strong, with little sign of a downturn. Indeed, poor UK economic conditions may help the company as shoppers look for better value gifting options.
As such, Card Factory (LON:CARD) could form part of a Trending Value investor's diversified portfolio due to its low earnings multiple. However, such investors need to be on high alert for any downturn in trading or if momentum in the stock starts to fade.

Profile

Card Factory is a Main Market-listed card and gifting accessory business with an approximately £300m market cap. Many investors will have seen or shopped in their stores, a feature of most high streets and shopping centres.

The company was started by husband and wife duo Dean and Janet Hoyle, with a single store in Wakefield in 1997. They added more stores rapidly and, by 2003, had acquired a distribution and manufacturing facility. A sale to Private Equity in 2010 netted the Hoyles what is rumoured to…

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greyster

14th Jun '23

Thank you Mark, I enjoyed the article.

I hold Card Factory (LON:CARD) in both my SIPP and in my short -term trading account. I always perform a dcf analysis based on the cashflow statement, and tend to zero out working capital movements as they can skew answers in both directions. I haven't fully got to grips with lease accounting impacts and so must research how I can refine DCF model.

Although I am glad they are increasing capX to around £24mn pa I do want to see that this generates turnover or margin improvement. It still looks good value to me, but a drop-off in sales may change that opinion. My models give around a 26% margin of safety, ie NPV versus current MV, and I don't put in a terminal value, creating another margin of safety.

I would like to see continued focus on minimising debt while growing the business, as nasty events do happen.

Happy to hold in SIPP, but considering options on trading position.

Greyster

shanklin100

Here's CockneyRebels's take on #CARD

https://cockneyrebel.substack....

You will probably need to enter your email address at some point. As with Mark's analysis, I believe its well worth reading.

Zipmanpeter

Nice article re Card Factory (LON:CARD), I think you are taking a quite narrow, dry view and there are important factors in the market background to add to your analysis.

The first is around the market size, struct and trajectory. A few years ago, it was assumed that that the card market would quickly go online (and even fully digital). Hence the initial excitement around £Moon. Hoever, and in line with the market research published before and after COVID by industry body both of them quote, this has not happened and is forecast to only happen only slowly.

The UK market for physical cards is large, only declining very slowly overall but gradually changing shape (from being driven by a move from a Xmas cards bulge to non-specific occassion cards including new, recently made up occassions through industry marketing. For instance, I recall they celebrated that something like a 'birthday card for your dog' was a big seller recently and they design ranges to specifically interest young people who (their research says continue to) find cards are added value gifts in today's digital world.

Critically, I think you take too dry a view of their instore offer and experience. Price is rarely as big a deal in decision making as people think when you really talk to people in depth (Disc. I'm an ex-Mkting Dir of low price consumer goods and done a lot of focus groups etc). Price usually comes in around 4th after things like value, brand , quality and convenience - what goods do you buy in Tesco? Certainly price is a critical attribute but one of a basket of things. That's why some poor people shop at Waitrose and Tesco.

So while I think price is important, I think that shopping for a card in a 'celebratory environment like a card shop offers a lot of hidden value vs buying the same in Asda. In one case, the shop is all about tthe emotional reward of anticipating a celebration or party or recognition of someone else ("Well done for passing your driving test"). Especially for lower income female consumers (nearly everyone buys cards but Mum's = the critical purchase base), this is a cheap, nice way to spend 20mins at lunchtime. It is possible stereotypically older, male, financially driven Stocko reader can miss this insight.

I tend to discount CARD's other aspirations. It's always tough to break into new markets and I think selling to supermarkets and as a wholesaler may be self defeating. Their efforts to break into and 'own' near adjacent markets like balloons looks very smart and may work and they are playing catch-up in leveraging their store/brand in omni-channel selling. However, I think they can succeed in this and add value to their (store) brand, helping these squeeze out independents and other specialists like perrenial basket case Clinton's. Similarly, I do not see them challenging for leadership of digital/online sales but with their high street brand, I see no reason why they cant significantly up their digital share from where it is now to the 10% they target. Frankly, it was an omission that they did not cover this move as soon as they saw Moonpig and Funky Pigeon get going.

Now we come to the stockmarket price. I agree it is financially weak still and risky (and the institutional memeory of the fact is only just escaped - so far - a dilutive share issue, means it should be lower than its glory days. However, the lease liabilities are all short term and they will be renewing leases in high street rental bloodbath. They can get stores cheaper and/or relocate to better sites cheaply.

I too would like them to use any and all their cash flow to strengthen the balance sheet ahead of even token dividends - but I see no reason why they will not be capable of generating very good returns again.

Net, net, I hold and think, having got lucky but being tarnished by recent history, they still have compelling structural advantages from production scale, market leadership /brand recognition which will come through over time - especially if they can grow share and push up prices through the inflation driven cost of living crisis and they hold these new higher prices. I had previous thought their cheap cards too cheap

The shares are not cheap any longer but probably fairly price for now but over the next 5 years may well do surprisingly well. As ever, only time will tell (I hold)

Helvellyn

A good read Mark, thank you.

Strategy

The company has identified three opportunities for long-term growth. The first is adding more partnerships, where they say:

We are continuing to analyse and identify new partnership opportunities with a focus on building the right partnerships to grow the business.

This part, I assume refers to manufacturing/supply arrangements with the competition you refer to

i.e. card retailers / supermarkets , of which Aldi is already one of their customers .

Saxonboy57

Thank you. an excellent in depth analysis. On balance, i think I will sit this one out

martinji

Just an anecdotal comment - historically I've always used Moonpig or Funky Pigeon to send cards. However for my last two occasions, I've used Card Factory's online offer. For my needs (sending personalised photo cards) it seems functionally identical to the other two, but cheaper, and so far seems to have delivered just as well too.

I didn't even realise they sold online until they came up when I was going through topcashback.

RebelChatRoom

Zipmanpeter, can I point out there has been NO dilutive share issue. The circa 340m shares have stayed the same since they floated

Card Factory: many happy returns?

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Mark Simpson

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