Cardsharp

cardsharp Factory Farming

The UK greeting card industry’s largest specialist multiple retailer, Card Factory reported its latest financial figures recently including insights into its all-important Christmas trading. Cardsharp delves deeper into the figures and tries to draw some conclusions.

Following on from Cardsharp’s column last month that focussed primarily on online card retailer Moonpig, its financial prospects and marketing campaigns, Cardsharp was given the opportunity to have a look at Card Factory’s recent performance and prospects. (Having bought some Card Factory shares when they hit rock bottom at 27 pence back the start of the pandemic back in April 2020,

Cardsharp admits that he does have a tiny vested interest in the value chain holding its value for shareholders.)

Card Factory certainly divides opinions among the UK greeting card community. Some see it as a bellwether of the industry and as the sector’s only PLC it is in many ways our strong PR card with the City and media.

Because of its vertical supply model, whereby most of its cards are produced by Card Factory itself, it is not popular with many publishers, and because of its low prices, it is not popular with multiple competitors or independent retailers. Cardsharp suspects, an independent’s antipathy to CF probably depends on their respective physical proximity to a Card Factory outlet.

Cardsharp was interested to read some of the responses to PG’s independent Retail Barometer survey. None questioned, saw the presence of Card Factory as a bonus, but a massive 68% were neutral about the chain. While over a quarter of respondents (24%) viewed the multiple as a threat, only 8% see it as a ‘major threat’. Perhaps this is an indication that even with Card Factory now trading from around 1,000 branches, resilient indies have learned to live and adapt to this retail monolith.

Card Factory recently released its trading figures for the last 11 months. Cardsharp needs to emphasise that these are not the full year’s figures so are open to interpretation. Its full year figures will be completed by the end of January this year, but they do allow for at least a stab at where the retail group is at present.

For the 11 months until December 31, Card Factory reported sales of £357 million, which the board claimed was “ahead of expectations”. In 2019 (you can forget 2020 as comparisons mean nothing with the Covid pandemic) sales in the corresponding period were £424 million. But you have to take into account that in the first four months of last

Above: Being a PLC, Card Factory has to face the vagaries of share price fluctuations on the stock exchange. Left: The run up to Christmas saw Card Factory push its online sites on social media. Belowe: Card Factory now trades from over 1,000 stores.

year Card Factory outlets were closed because of lockdown.

This was achieved, according to Card Factory despite general footfall being down by 19% compared with 2019. These figures, if correct, are pretty impressive.

These results, the board claim, will lead to a year end profit figure of around £71-74 million before EBITDA. Wow, that sounds impressive on first reading until you look at what EBITDA is!

EBITDA is widely used when assessing the performance of a company, and often features in press releases, partly to inform, partly to baffle, it seems to Cardsharp. Basically, it stands for ‘earnings before interest, taxes, depreciation and amortisation’. It is often used to put a very positive gloss on a set of financial results, but as it is so commonly discredited Cardsharp wonders why it is used in the first place! It is generally recognised at best as being unreliable and ‘accounting gamesmanship’ or ‘smoke and mirrors’.

And to Cardsharp’s mind this is no exception. This was the profit that Card Factory says it would have made if it wasn’t for ‘exceptional circumstances’.

On this occasion, Card Factory has piled in a sharp increase in transport and wage bills as the contributary factors. Cardsharp just doesn’t get that! We could all claim our business’s profit would have been such and such higher, if only for x or y? It really defies belief that anyone would think it means anything!

The figure that matters is the real predicted profit for the year end which the CF board reckon will be in the region of £7-10 million. Cardsharp reckons that given that Card Factory standalone shops were forced to close for the first four months of last year (meaning they completely missed out on the Spring Seasons), these predicted figures are certainly nothing to be ashamed of, especially as it reported steady trading in the run up to Christmas despite a decrease in footfall.

What was also interesting is that Card Factory managed to reduce its net debt by £27 million, from £87 million to £60 million, which was very encouraging. However, that was not enough to please the City, and the share price went down by 20% subsequent to the announcement.

This means that as PG went to press Card Factory is valued at only £217 million despite its thousand or so stores. Amazingly this is less than a fifth of the market valuation of Moonpig at present.

This seems a ridiculous low valuation to Cardsharp. The highly rated financial website, Simplywall.St, thinks the shares at present are 50% lower than their true value, which would put the share price over a £1 rather than the current price of 50 pence.

One thing Cardsharp thinks does not help the City’s opinion of Card Factory was its poor online performance. Getting Personal, one of CF’s online platforms, which was only launched in 2011, actually saw its sales fall by 8.5%, over the previous year. Card Factory’s ceo Darcy Willson-Rymer’s (older readers will remember the name from his short tenure in the top job at Clintons just prior to its business failure) explanations sounded a little weak to Cardsharp, saying it was due primarily to a greater emphasis on higher priced and higher margin products. Make that of that what you will!

Certainly, Darcy and his team have a lot to do if they are to “Focus on the implementation of our strategy and the transformation of the business to a full omni-channel retailer”.

Zoe Mills, the retail analyst at Global Data, certainly feels there is a lot of work to be done here, describing Card Factory’s online business as “over complicated”.

Cardsharp also wonders, apart from its online business development, about where Card Factory goes from here. True, it has added a small amount of turnover by supplying its cards to Aldi and Matalan and The Reject Shop in Australia, but this is hardly going to dramatically enhance the future of the business, especially when the board has forecasted a sales figure of £600million by 2026.

In many ways, Card Factory is a victim of its own success and its vertically own brand integrated model. If it were privately

owned, it could continue for many years, given a Covid-free environment, making healthy profits every year. But being a public-listed company, it has to keep growing and growing to keep investors happy. And that is the very tricky part.

If it were to acquire a higher priced greeting card rival like Clintons, not only would it cannibalise sales at Card Factory, but it would also reduce its margins which again would not please the City. So, although Cardsharp thinks Card Factory will bounce back in the short term, he does wonder what its future will look like.

Certainly though, concludes Cardsharp, Card Factory has come a long way since founders Dean and Janet Hoyle first founded the company selling wholesale cards out of a van in Wakefield. They sold out in 2010 for £350 million. Cardsharp is not expecting to make anything like that from his shareholding!

Left: While still very much a value operator, the last year has seen Card Factory push some of its prices up. Below left: Darcy Willson-Rymer in his Clintons days. Below right: Dean Hoyle, founder of Card Factory in a jubilant moment when his beloved Huddersfield Town FC (of which he is a 25% owner as well as its interim ceo) performed well…like him on his sell out of CF!