Happy returns as greetings card firm takes on the internet threat
The investment column that makes the most of your money
THERE was a time when electronic cards were expected to send the traditional market into terminal decline. Doom mongers were convinced that printed cards would become yesterday’s story, as consumers embraced the easier, cheaper electronic option.
That has not happened. The UK card market is worth about £1.4billion annually and the average adult buys 30 cards a year. The stability of the market has helped Card Factory to increase same-store sales every year since it was founded in 1997.
The shares are 360¾p and should deliver both capital and income growth as the group has a welldefined expansion strategy and is committed to returning cash to shareholders via regular and special dividends.
Card Factory is different from most card retailers because it designs and prints virtually all its own cards. The design studio is based at the company’s headquarters in Wakefield, Yorkshire, and the printing site is 25 miles up the road in Baildon.
Doing most of the work in-house keeps Card Factory’s costs low and means that it can sell good quality cards in its 800 stores more cheaply than rivals. The vast majority of cards cost less than £1 to buy and the group sells about 250million a year, as well as the other paraphernalia normally found in card shops, such as wrapping paper, balloons and small gifts.
Founded 18 years ago in Wakefield, the company has opened 50 stores a year for the past 12 years and intends to continue at the same pace for at least another eight years. Chief executive Richard Hayes has done the market research and believes that there is room for 1,200 Card Factory outlets in the UK and Ireland, 50 per cent more than there are today.
Hayes joined the business as finance director in 2003, having been its relationship bank manager at NatWest for the previous three years. At the time, Card Factory was run by its founders, Dean and Janet Hoyle, who stepped back from the business in 2010, when Hayes became chief executive.
The company was floated in 2014, since when Hayes has remained resolutely focused on a four-part business plan.
First, he plans to continue delivering growth from existing stores of about 2.5 per cent a year. Second, he wants to add new stores at a rate of 50 a year. Third, he wants to cut costs in a variety of ways, such as extracting better terms from suppliers as the company grows, and pushing for lower rents from landlords when leases that were arranged before the financial crisis come up for review.
Finally, he wants to develop the firm’s online range, so he revamped the website earlier this year and recently moved into the personalised card and gift sector with a website called Getting Personal.
The strategy is working well. In September, Card Factory reported an 8 per cent increase in sales to £161million for the six months to end July with pre-tax profits up 72 per cent to £25.7million.
The gain partly reflects the effect of various flotation costs incurred last year but the firm also delivered an 8 per cent dividend increase to 2.5p and a special dividend of 15p.
Brokers expect full-year sales to January 31 to increase 7.6 per cent to £380 million, with underlying profits up 21 per cent to almost £80million. A 9 per cent increase in the dividend to 7.4p is forecast, excluding the special payment.
‘Special’ implies that such payments will be relatively rare, but Card Factory may be more generous with its specials than most. The group has high profit margins and relatively modest investment needs so it generates plenty of cash every year. Hayes has said the group will return some of that money to shareholders when it is appropriate and certain brokers believe that could be an almost annual occurrence.
Against that, the introduction of the living wage could put pressure on Card Factory next year. Hayes is hoping to mitigate the cost through housekeeping measures elsewhere, but there is a chance that profit margins could be squeezed.
In the meantime, the group has Christmas to look forward to. It is less than eight weeks away and organised shoppers are already stocking up.
Card Factory employs 8,000 staff during the year but adds another 5,000 in the run-up to Christmas to cope with the extra footfall. Boxed sets of cards are extremely cheap and generate precious little profit, but gifts, paper and such like have a meaningful impact on sales.
Midas verdict: Card Factory has done well since flotation and should continue to do so. City supporters believe the shares should reach at least 450p over the next year, an almost 25 per cent increase on the price today. The prospect of special dividends adds to this stock’s attraction. Buy.