Seeking a cash-generative retailer with underappreciated growth prospects and a low equity valuation that suggests significant re-rating potential? Then look no further than Card Factory (CARD), the value-focused greeting cards-to-party supplies seller with a modest share of a large TAM (total addressable market).
Given its average basket size is below a fiver and its average card price is just £1.21, Card Factory should continue to profit if cost-of-living pressures persist, while an improving consumer backdrop driven by interest rate cuts should boost sales of its higher ticket gifting ranges. Having dramatically reduced debt, the £343.4 million cap can now return cash to shareholders through dividends and consider acquisitions to enhance growth.
Berenberg argues the recent reinstatement of the shareholder payout is ‘likely to broaden Card Factory’s appeal and provide a catalyst for expanded investor attention’.
CELEBRATING GROWTH
Over three years into CEO Darcy Willson-Rymer’s ‘Opening our New Future Strategy’, Wakefield-headquartered Card Factory has become a much stronger business, both financially and operationally, and Willson-Rymer is targeting a rise in revenue to £650 million by the year to January 2027.
Card Factory is the UK’s leading specialist retailer of greetings cards, focusing on the value end of the market. Vertical integration enables the retailer to keep prices lower than peers, while expansion into gifting and celebrations has widened its TAM (total addressable market).
Management estimates there is a potential total TAM of £13.4 billion in the UK alone, which it refers to as the UK celebration occasions market, comprised of a £1.4 billion greeting cards market, a £2 billion celebration essentials market and a £10 billion gift market. The growing focus on gifting and celebration essentials categories is helping to drive store like-for-like sales growth.
GREATER REACH & SCALE
Another bull point is Card Factory’s estate of 1,058 stores in the UK and Ireland, which provides greater reach and scale than that of competitors. Berenberg believes the estate is the group’s ‘deepest competitive moat’, as this network ‘creates a broader distribution platform than possessed by peers, and would be costly and difficult to replicate’.
Card Factory does have meaningful exposure to the structurally challenged UK high street, yet over 99% of its brick-and-mortar outlets are profitable, the quality of the estate is enhanced by an average lease length of just five years, and there is still white space to expand into, notably in central London and the Republic of Ireland.
The discounter also has opportunities in the under-exploited online channel through its cardfactory.co.uk and gettingpersonal.co.uk sites and is also expanding globally through its partnerships business. In the UK, Card Factory has partnered with retailers including Aldi and Matalan, whilst internationally, it has inked agreements with The Reject Shop in Australia and is also developing operations in the Middle East as well as South Africa, following its acquisition of SA Greetings last year.
CHEAPER THAN ONE OF ITS CARDS
Bears will argue the decline of the UK greetings card market poses a long-term threat to Card Factory’s growth and we acknowledge the company faces stiff competition from card specialists, online-only players and the major supermarkets and discounters.
However, we note that Pillarbox Designs, the privately owned parent of Cardzone, Hallmark UK and Clintons Cards, has conceded that Clintons stores are in a ‘worse state than expected’ with profitability not on the horizon until December 2025. This presents Card Factory with a gift-wrapped opportunity to bag even more market share from one of its closest competitors.
At the full year results in April, Card Factory announced a welcome return to the dividend list, having reduced net debt by 40% to £34.4 million in the year to January 2024. For the year to January 2025, Berenberg forecasts a rise in pre-tax profit from £62 million to £69 million as sales tick up from £511 million to £552 million, ahead of taxable profits of £75 million on £591 million turnover in full year 2026.
Based on forecast earnings of 14.9p and a 4.66p dividend for this year, Card Factory’s shares trade on a single digit PE (price to earnings ratio) of just 6.6 and offer a 4.7% yield. A re-rating to just 10 times forward earnings, which seems achievable in the near term, implies a 149p share price, while Card Factory’s return to the dividend trail offers a catalyst for value and income investors to revisit the name.
Canaccord Genuity says: ‘Dividends have been reinstated and strong free cash flow generation will see leverage reduce further and the group move to net cash position, paving the way for additional shareholder returns over time.’
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
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