Card Factory – a tuckaway recovery play

Card Factory looks set to bounce back strongly after lockdown as it capitalises on the country’s obsession for greetings cards, writes Mark Watson-Mitchell. 

It will soon be Christmas!

Did you know that the commercial Christmas card was invented in 1846 by Sir Henry Cole? He was the chief organiser of the Great Exhibition, pioneer of the penny post and founder of the V&A Museum.

Around 100m single Christmas cards are purchased each year.

The way the time is flying now that we have partially come out of lockdown, yes it really will be Christmas very soon.

Despite tricky markets there is scope for capital gains

Admittedly we will have some thrills and spills along the way and plenty of bargains will be found and, no doubt, we will miss many too.

However, there is one opportunity that we should be looking at – Card Factory (LON:CARD).

This retail group has had its worse than fair share of spills over the last five months and its results for this trading year will look appalling. But now could well be the time to tuck a few of its shares away into your ‘recovery’ portfolios.

The group and its operations

The company, which started in 1997, is today the UK’s leading specialist retailer of greetings cards, dressings and gifts.

It is based in Wakefield, West Yorkshire, where it has its own design studio, in-house printing and central warehousing facilities.

Its retail estate across the UK and Ireland is currently around 1,018 stores and has some 9,000 employees. It also has three franchised stores as well as 866 partner stores, mainly with Aldi in the UK and with The Reject Shop in Australia.

The UK marketplace

As we all know there are cards for almost every single event or emotion in daily life.

It is reckoned that 85% of all cards are bought by women. In the UK we buy more cards per person than any other nation, some 33 each year.

The UK greetings card market, which in design terms is said to be ten years ahead of the rest of the world, in 2019 was worth around £1.7bn – and that was in a good open retail year. However, the lockdown will have sliced that total market sales figure significantly.

Dominant market share and trading

The Card Factory business claims to have a 34% UK market share. During lockdown it too has had closed retail operations, which recent reports suggested are now largely back in business again.

Over the last five years the group’s revenues have increased each year, from £382m in 2016 to £451m for the year to end-January 2020.

Broker’s estimates are now expecting that current-year sales will drop to around £300m and then bounce back to around £420m next year.

Last year’s pre-tax profit of £65.2m will be followed by just over £10m this year and recover to about £40m next year.

Earnings per share were 15.9p last year, will be close to 2.5p this year and could well quadruple next year to 10p.

Its financing stance

To cope with the lockdown pressures on its operations the group has done several deals with its landlords, its suppliers and others. It has also taken advantage of Government funding schemes.

The group expects to remain within its banking covenants. Net debt as at 19 July was below its own forecasts at £144.2m.

Ambitious growth strategy over next five years

Despite all the current pressures the group’s management has determined strategies that should help to ensure we see impressive growth over the next five years.

It is aiming that by 2025 it will be turning over £635m annually, with an underlying pre-tax profit of £105m, and operating UK and internationally from some 5,600 distribution points, of which its own estate will be 1,100 stores.

A well-spread institutional shareholder list

There are 341.6m shares in issue of which the biggest holder is Teleios Capital Partners with 66.5m shares.

Other large holders include Artemis Investment Management (10.0%), DBAY Advisors (8.39%), Aberforth Partners (6.66%), Coutts & Co (5.29%), Majedie Asset Management (4.92%), St. James’s Place (4.89%), and Hargreaves Lansdown Stockbrokers (3.75%).

Liberum Capital see the shares more than doubling

Last week analyst Adam Tomlinson at Liberum Capital declared that the group now has a greater focus on high-margin single greetings cards. He has put a price objective of 100p on the group’s shares and rates them as a ‘strong buy’.

Card Factory shares, which hit 390p five years ago, in the last year have been as high as 185p and as low as 31p in late March.

Last night they closed at 42p, at which level, despite possible second lockdown risks, I would rate them as a classic recovery play.

My end-2020 target price is 60p.