Card Factory

Description

Card Factory focuses on the value and mid-market segments of the UK’s greeting cards market, providing a wide range of products, including small gifts and gift dressings. Founded in 1997, the company has grown from its headquarters in Wakefield (West Yorkshire) into a national retailer which operates through a network of more than 800 stores across the UK and through an established online presence.

We first invested in Card Factory in April 2017, when the business joined the portfolios of both open-ended funds. Since then, the position has grown as our conviction in the investment case has gradually built and the valuation anomaly that we see, has increased.

Investment case summary

Since the outcome of the EU referendum, the UK stock market has been shunned by global asset allocators, and domestically-focused stocks in particular have been heavily out-of-favour. As a result, a compelling, contrarian valuation opportunity has emerged in some good quality, well-managed UK-focused businesses, with Card Factory among them.

More specifically, Card Factory, is a relatively straightforward business with some simple attractions. It is very cash generative and, it has a good management team with a track record for returning substantial amounts of cash to investors through (ordinary and special) dividend payments. None of these attractions is adequately reflected in the valuation of the shares.

Living wage and currency-related cost increases further weighed on the company’s share price in the second half of 2017. We have been encouraged by management’s disciplined response to these temporary headwinds – in refusing to pass on these costs to its customers, it has taken a short-term hit to margins, but should emerge with an even stronger market position. The company is also dealing admirably with the competitive pressures facing all high street retailers, assisted by a refreshed product range and cost-saving initiatives.

Ask a question about our investment in Card Factory

Fund exposure
Income Focus Fund 2.62%
Equity Income Fund 0.48%

As at 31 December 2018

Segmentation
Geography United Kingdom
Industry Consumer Services
Themes UK domestic exposure

Source: Woodford

Share Price

Market Quotes by TradingView

Commentary

Mixed interim results

We had interim results from Card Factory earlier this week. The share price was initially weak in response but have quickly recovered. Total like-for-like sales declined by 0.2% during the period, which is a respectable performance, given the challenging trading conditions and the supposed structural headwinds that this company faces. The continued roll-out of new stores enabled revenues to increase by 3.2%. Underlying profit, however, came under pressure, falling by 11.6% year-on-year, reflecting the impact of recent operational investments and cost headwinds from the national living wage.

The company saw record sales numbers for events such as Valentine’s Day, Mother’s Day and Father’s Day. This shows that a focus on the offering can deliver results and bodes well for the key Christmas trading period. This focus is now being switched to the everyday proposition.

The special dividend has fallen to 5p, at the bottom end of the guided 5-10p range, and the interim has been held flat at 2.9p. If we assume that the final is also held flat at 6.4p, then the total cash return for the current year is 14.3p, which represents a more than 7% yield at the prevailing share price and highlights the continued cash generative capabilities of this business. Management has reiterated its willingness to continue to return cash on an annual basis whilst holding debt in the range of 1-2x Ebitda over the medium-term.

We believe, shares in Card Factory discount the prospect of a very bleak trading performance for the foreseeable future. Our macro-economic analysis suggests that this scenario is too pessimistic, and in a more favourable trading environment, there is considerable scope for progressively higher earnings and a higher valuation. In the meantime, management have responded to the trading challenges with an appropriate balance of cost management, strategic initiatives and price discipline.

Stephen Lamacraft
27 September 2018

A good set of financial results

Card Factory has today reported its annual financial results for the year ended 31 January 2018, delivering a full year dividend of 9.3p (a 2.2% increase on the previous year’s dividend payment) and confirming that the trading outlook for the current financial year remains in line with management expectations. Additionally, the company’s Ebitda of £94m was in the range given by management in December 2017.

This stock is a good example of what we’ve been talking about in recent months – it’s a high quality, UK-focused business that is delivering good growth but which has seen its share price and valuation metrics decline progressively over the course of the last two years. The shares have responded well to today’s results but remain lowly-valued and capable of delivering very attractive returns in the years ahead. The recent return of real wage growth in the UK economy highlights the growing macroeconomic tailwinds, which companies like Card Factory should benefit from.

Stephen Lamacraft
10 April 2018

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

© 2019 Woodford Investment Management Ltd.
All rights reserved.

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