Card Factory — Look inside the card

Card Factory is the UK’s leading specialist retailer of greeting cards, gifts and celebration essentials. The management’s strategy, ‘Opening Our New Future’, has positioned it in larger addressable markets of related products, which it expects will provide greater growth opportunities, making CARD less reliant on the fortunes of the core product category, which has historically been low growth but relatively resilient. In the UK, it benefits from an extensive store portfolio that continues to grow and online sites, where recent investment has improved functionality. In addition to providing growth in both distribution channels, management believes better use of the offline and online assets are enabling it to boost customer loyalty and spend by offering new services, as evidenced by the success of click and collect (C&C). In addition to the growth opportunities in the UK, management has identified seven key international markets, in which the population has a high propensity to give cards and gifts, where they believe the brand proposition will resonate. This is not completely new territory for the company, as it has an established ‘partnership’ model with a number of other companies in the UK and in three of the seven identified international markets.

CARD’s FY24 results demonstrated strong year-on-year growth in revenue of c 10% to £510.9m and reported PBT of 25% to £65.6m, a margin of 12.8% versus FY23’s 11.3%. Improvements in the commercial offer (ie range development), annualisation of targeted price increases, improved sales productivity per store and better freight costs were helpful to profit growth, but this was partially offset by foreign exchange, the increase in the national living wage and investment to drive future growth. The growth was driven by cardfactory stores and Partnerships, while the company’s two websites need to see a significant improvement in growth to meet targets. Thankfully, there were more encouraging signs at one of the websites in H224 following investment in the platform. Following the repayment of debt, which had restrictions with respect to payments, management has resumed the payment of ordinary dividends, with a progressive dividend policy.

CARD’s valuation appears attractive however we look at it. Our discounted cash flow (DCF)-based valuation is 180p per share, assuming 2% revenue growth pa and a flat operating margin (16%) beyond FY27, with a WACC of 9.5% and a terminal growth rate of 2%. The undervaluation of the share price is confirmed when we look at its prospective EV/sales multiples (excluding lease liabilities) for FY25 and FY26 of 0.65x and 0.6x, versus much higher historical multiples and when taking into consideration relative levels of profitability. There are few directly comparable quoted peers, but in Exhibit 10 we compare CARD’s valuation to other leading UK retailers, including those with an increasing omnichannel presence. Although the comparators are imperfect, CARD’s valuation looks low despite a more attractive revenue growth profile and relative levels of profitability.

While many of the growth opportunities play to the strengths of CARD’s brand and value proposition, and it has already made good progress with its new growth initiatives, we believe the key sensitivities are: the product categories are highly competitive and some are low growth; it is in the early stages of leveraging its brand online; developing international partnerships in new countries presents execution and macroeconomic risks; overseas sourcing brings potential for supply disruption and exposes the company to changes in foreign exchange; and the expansion into new categories and business areas may provide margin headwinds.

CARD is the UK’s leading specialist retailer of greeting cards and has expanded its focus into other categories: celebration essentials (balloons, party supplies, wrap and bags) and gifts (soft toys, stationery, books, candles, etc) with a strategy to accelerate its presence online and in select international markets.

CARD opened its first UK store in Wakefield (the corporate headquarters is located in the city) in 1997 and has grown its estate, mainly organically but also with a couple of acquisitions, to 1,058 stores at the end of January 2024. As the company grew, it acquired warehousing and distribution (2003), design (2005) and manufacturing (2009; Printcraft is the largest greeting card manufacturer in Europe) capabilities, to become a vertically integrated supplier of the majority of the cards it sells.

To complement its physical stores, CARD entered the online world in 2011 with the acquisition of www.gettingpersonal.co.uk, an online retailer of personalised gifts. This was closely followed by the 2012 launch of its own transactional website, www.cardfactory.co.uk.

In addition to expanding its own store footprint in the UK, CARD has grown its presence in the UK and begun to expand into other countries (Australia, South Africa and the Middle East to date) where customers have a high propensity to give cards and gifts, through partnerships and wholesale arrangements, and via acquisition.

CARD historically focused on the value and mid-market segments of its product categories, offering better value at each price point than its competitors. With an initial focus on cards, the product categories expanded to complementary products associated with card giving. Today, it also offers products with higher price points, albeit maintaining its relative value proposition versus its peers is core to the brand offer.

CARD’s vertical integration enables it to offer differentiated and high-quality products and to better control costs with the aim of offering affordable prices to its customers. The vertical integration enables the company to react to changes in market trends and produce more of items that are selling well, but this is further helped by improved data gathering from its store portfolio and online activities. In addition to its own cards, the customer offer is rounded out by third-party products (eg licensed cards). In FY24, 80% of cards and 70% of gifts and celebration essentials were designed in house.

At the time of the company’s IPO in May 2014, there were four pillars to the strategy: continue delivering like-for-like sales growth; expand the store base to 1,200 stores (from 713 at end FY14) including 100 stores in the Republic of Ireland; cost control to deliver best-in-class margin; and develop online activities, which represented c 6% of the greeting cards market at the time.

The strategy produced good long-term revenue growth, but profitability suffered despite relatively resilient gross profit margins. As we discuss later, the new strategy is delivering more attractive financial results.

The current CEO, Darcy Willson Rymer, was appointed in May 2021, while the company was managing the effects of the COVID-19 pandemic. In FY22 the company announced its ‘Opening Our New Future’ strategy, which was presented in detail at its capital markets day (CMD) in May 2023, along with the presentation of FY23’s final results.

Delivery of the strategy would mean that CARD becomes:

Management identified three key areas of focus in order to deliver the strategy, which sit alongside the ongoing investment to drive growth in the core business in the UK and Ireland. Management expects the core business will grow by increasing and optimising the store estate to cover underpenetrated markets (including London and Ireland), and by continuing to grow leadership in the core card category through market- and customer-insight led product innovation and range development by its own design and manufacturing teams. With respect to range development and product innovation, recent examples include cards that recognise increasing diversity and cards from the family pet, which have proven to be very popular.

As demonstrated through this report, we believe the company has already made good progress in all of the three key areas of focus:

The key to developing an omnichannel presence, in addition to having an extensive store footprint given the nature and low value of CARD’s products, is to systems that can support both offline and online activities, and then develop services that can utilise the benefits of both distribution channels. CARD’s ability to service customers across both channels provides a competitive advantage versus online-only companies and the pure bricks-and-mortar retailers.

The change in focus to new product categories, taking greater advantage of its brand in the online world and seeking targeted international growth has significantly increased CARD’s addressable markets. In the UK, in addition to, its traditional focus on the UK greeting cards market (estimated value of £1.4bn, source: CMD23 presentation), addressable markets now include the celebration essentials (estimated value c £2bn) and gifts (estimated addressable c £10bn from a total of £40bn) markets. In FY24, cardfactory stores generated revenue of c £479m, so if roughly half of this is from cards, its card revenue is c £240m. Management describes the UK greeting card market as low growth and relatively resilient. Prior to the COVID-19 pandemic, online gained value share of the market, and naturally the pandemic provided a significant short-term boost to the market, but this has subsequently normalised. According to the CMD23 presentation, online’s value share of the market was 21% in FY23, down from the COVID-related peak of 36% in FY21. The company’s FY24 annual report highlights that online’s volume share of 15% in 2023 had declined by 2pp from 17% in 2022.

In addition, entering new international markets significantly increases the company’s addressable markets. Management estimates the seven key international greeting cards markets the company is targeting are worth £8bn, which increases to £80bn when the celebrations essentials and gifts markets are included.

CARD’s product focus continues to be card led, but it has redefined its markets to address growth opportunities in other categories. Non-card revenue has been growing in importance, increasing from c 40% of revenue in FY15 to c 48% in FY22, the last time the figures were disclosed. In its financial targets for FY27 (see below), management anticipated that revenue from celebration essentials and gifts would increase in importance to non-Partnership revenue, from 34% and 16% in FY23, respectively, to 17% and 36% in FY27, while greeting cards would decline from 50% to 47%.

At the time of the CMD, management provided financial targets for FY27. This included a target for revenue of £650m and an adjusted PBT margin of 14%. If achieved, these would represent attractive rates of growth from the FY23 base, a four-year CAGR for revenue of 9% and for adjusted PBT of 17% if we take the margin target literally (ie without any rounding). At the time, management indicated some of the growth would be back-end weighted in this timeframe. As shown in the Financials section and the sections that follow on the individual revenue streams, the strategy is already providing strong revenue growth, and improvements in profitability and cash generation that are helping to de-gear the balance sheet, enabling the reinstatement of ordinary dividend payments.

In the following interview, Darcy Willson-Rymer provides an overview of CARD’s strategy and growth outlook.

An extensive and refreshed store estate to accommodate the newer product categories is, by definition, critical to the provision of omnichannel retail to customers, as well as providing convenience to customers.

Growth of and reshaping the store estate and taking share in the new product categories will be important drivers of management’s FY27 financial targets. Management targets revenue of £520m from its own stores in FY27. Meeting the target would mean CARD’s own stores would still contribute the majority (ie 80%) of total group revenue at that time, versus 95% of the FY23 base. The target implies a four-year revenue CAGR of c 4% by cardfactory stores from the FY23 base of c £440m.

The FY24 results indicate that the company has made good progress, with store revenue growth of c 9% to £478.9m, above the required 4% CAGR above. This reflects a slight front-end loading of net new store openings, 26 in FY24 versus 90 from FY23–27, as well as a good improvement in sales productivity (ie sales per average store).

CARD has an extensive store base, operating in 1,058 locations at the end of FY24. Its stores are in a wide range of locations, including on high streets in small towns through to major cities, shopping centre developments, out-of-town retail parks and factory outlet centres.

The store base grew quickly and relatively consistently up until the start of the COVID-19 pandemic; the prior management team targeted opening c 50 net new stores pa, equivalent to 5–7% pa growth from the IPO (713 stores at end FY14) through FY20. At the time of the IPO, the ambition was to reach up to 1,200 stores, including 100 stores in Ireland. Coincident with the COVID-19 pandemic, the company reduced the target to 1,100 stores, and FY21, the first full financial year to be affected by the pandemic, saw a small reduction in the number of stores for the first time as management focused on managing profitability.

Under the ‘Opening Our New Future’ strategy, management has indicated it will add c 90 net new stores by the end of FY27, equivalent to c 2% growth in the store base per year on average, taking the number of stores to c 1,120, so between the two targets noted above. The main underpenetrated markets include Ireland and London (three stores at end FY24). The company’s move into London has been helped by more appealing property costs, but has required a slightly different product range, and the company is still in the learning phase with respect to the best layout for its stores in London.

The targeted 4% CAGR for cardfactory store revenue includes a CAGR for the number of stores of 2%, indicating that management expects improving sales productivity (ie sales per store). Previously, there was an expected natural dilution in store productivity as the newer stores were opened in locations with lower footfall. As can be seen in Exhibit 4, outside the pandemic-affected FY20 and FY21, there was some minor dilution in sales per average store in only FY17 and FY18, so it was able to fend off the expected dilution in most years. The FY24 results show a good improvement in sales productivity, with revenue per average store of c £458k, almost back to the FY16 peak of c £460k.

Trials for the formats of stores, which took into account the greater emphasis on different product categories, led to the development of a new Store Evolution Programme, which consists of three options for existing and new stores:

The inventory in stores is replenished frequently, typically weekly, with most products being sent direct from CARD’s central warehouse using third-party transportation.

It is clear from the forward-looking revenue targets (see below) that management is optimistic about its future online prospects in isolation and as an important conduit to driving the wider omnichannel aspirations. Following a period of investment in the websites and supporting infrastructure, management expects the key drivers to future growth will be greater customer awareness of its online capabilities, growing ranges including complementary products and a better customer experience.

At the 2023 CMD, management set a financial target for online and omnichannel to contribute £47m of revenue in FY27, equivalent to 7% of the total revenue target of £650m. From the FY23 base of c £17m, the revenue targets would represent a very attractive CAGR of c 28%.

Management estimates that online represented 21% of the greetings card market in FY23, highlighting the opportunity that is available to the company, down from 36% in FY21 due to the change in shopping habits in the COVID-19 pandemic. The online world naturally favours higher-value products, given the incidental cost of postage, and a high level of personalisation.

CARD’s online activities consist of its eponymous website, www.cardfactory.co.uk, launched in 2012, and www.gettingpersonal.co.uk, acquired in 2011. The former has produced strong growth in absolute terms but has not developed as quickly as the market, representing just 2% of group revenue in FY24. The development of Getting Personal has been disappointing after initial strong growth, representing just 1% of group revenue in FY24, having peaked at almost 5% in FY16. FY24 was a challenging year for CARD’s online activities; total revenue fell by 15% but there was a significant improvement in performance by CARD’s main website, cardfactory.co.uk, in the second half of the year (see the Financials section). The company recognised an impairment charge of £1.1m for Getting Personal in the FY24 results.

Migrating the two platforms together and then re-platforming the combined websites has affected revenue growth in more recent years, with relatively little focus on new product development and marketing. Other external factors, such as the normalisation of online trading generally following the boost provided by the pandemic and more recent train and postal strikes, have also affected demand.

To give some indication of the extent of its online product offer, as at 6 June 2024 the website listed c 9,300 cards (ranging in price from £1.49 per card) with personalised cards beginning at £1.79 per card; c 2,000 gifts/experiences (ranging in price from £1.49 to c £185); and over 900 ballons (ranging in price from £1.99 to £49.99) as well party accessories and flowers. It is clear that personalisation, important for the online market, is an increasing focus for management. The company has significant manufacturing capacity to accommodate the incremental volume of personalised cards.

To its customers, the first and most apparent indication of CARD’s omnichannel credentials is the roll-out of the C&C service, which enables customers to order products online and collect them in store, aiding convenience. The C&C trial that began in H123 was completed by the end of the year and national roll-out was completed by the end of April 2023. As management hoped, the service has boosted average online order values; average basket values for C&C orders were more than double the average basket value of an online order in FY24.

C&C orders are currently fulfilled from CARD’s central warehouse. The ordered products typically take one to two days to arrive in stores, a significant improvement from the previous three to five days, which was sub-optimal for customers. As ongoing investment helps to improve in-store availability of individual stock keeping units (SKUs), fulfilment of C&C is likely to improve significantly.

If revenue growth comes through as management expects, this will be a useful boost to overall profitability as the revenue profile along with higher investment have led to its online activities being unprofitable since FY22. In FY24 the combined EBITDA loss of both websites was £5.7m versus a loss of £3.7m in FY23. The sharing of costs between the two websites should be beneficial for profitability.

CARD partners with companies in the UK and international markets in order to maximise distribution of its products and convenience for all potential customers.

At the 2023 CMD, management targeted partnerships to provide £84m of revenue by FY27, c 13% of the group total. If achieved, the very attractive CAGR of just over 100% from the FY23 base of £5m would make it the most important incremental growth opportunity for the company. At the CMD, management indicated revenue growth would be back-end weighted within this timeframe, given the time required to agree the relationships and then begin trading. In all regions, management has identified and is in discussions with potential partners.

For partnerships, there are three types of operating model: franchise; wholesale-full service; and wholesale-supply only. For each, CARD recognises either a wholesale margin or a royalty based on sales with no or low capital investment requirements and no or limited operating costs.

With respect to wholesale, the main difference between the two models is who provides the last mile logistics and in-store merchandising: CARD in the case of full service, and the wholesale partner in supply only. For wholesale relationships, CARD recognises a wholesale margin, therefore as these become more important to the group they will be dilutive to the gross margin, but operating costs to support revenue are lower than for typical own-store revenue and help to leverage CARD’s other fixed costs.

Franchise partners are required to provide a commitment to a market development plan, local customer and market insight and the capital investment to grow the brand in return for CARD’s brand, product range and initial financial support for training, merchandising and store layout such as contributing to or investing in fixtures and fittings and/or supply of point-of-sale materials.

With respect to the overseas opportunity, management has identified seven key international markets where it thinks the cardfactory brand will resonate, given apparent gaps in the market for value and quality products. In descending order of size of the perceived opportunity the markets are: the US, Australia, Canada, South Africa, the Middle East, India and New Zealand. The main attractions of these markets are the populations have a high propensity to give greeting cards and gifts, and the average transaction values (over £4) compare very favourably with the UK (over £1).

It is obviously very helpful that English is the main or an important language for a good proportion of the populations in these countries, but that does not rule out other markets with a card and gift giving culture. The product offer in some markets may have to evolve to satisfy national and religious sensitivities. For example, in the Middle East, age-specific cards have very little appeal so have required some modification.

The company has already made good progress with boosting its international presence since the new strategy was announced. In April 2023 it signed an exclusive long-term master franchise agreement in the Middle East with Liwa Trading Enterprises, which plans to open 36 stores in the five years after signing. At the same time the company acquired SA Greetings, a wholesaler and retailer of greeting cards and gift packaging in South Africa, for £2.5m. The acquisition provided a leading presence in the market through 27 Cardies stores, an online store and 6,500 partnership distribution points.

These follow a quick scaling of revenue from partnerships since trials began in FY19 to over 8,000 partnership distribution points by the end of FY24. Its first initial partners included Aldi and Matalan in the UK, Sandpiper CI in the Channel Islands and The Reject Shop in Australia.

In FY24, CARD made good progress towards its FY27 revenue target, growing revenue by over 240% y-o-y to £17m, including a first-time contribution from SA Greetings of £10.4m.

As already highlighted, CARD’s ‘Opening Our New Future’ strategy significantly increases its addressable markets in the UK and Ireland (mainly product categories but distribution channels too) and in new international markets. Naturally, entering and expanding into the new product categories brings the company into competition with existing and new competitors, and expanding overseas presents new macroeconomic and execution risks.

The UK greetings card market is very fragmented with competitors including specialist chains, grocery chains, other generalists and online operators. CARD’s value for money proposition versus its competitors is well understood by the UK consumer.

The single card market is described as resilient. Historically it has been low growth with volume declines being offset by price growth. According to the company’s own data, in 2023 the market experienced volume declines of 8% due to cost-of-living pressures, but the average price paid increased by 16%, from £1.66 to £1.83.

Prior to the COVID-19 pandemic, online gained share of the card market, and naturally the pandemic provided a significant boost to the market, but this has subsequently normalised. With just 3% of group revenue from online in FY24, it presents an obvious growth opportunity for CARD if it can build brand awareness and engagement following the investment in online, but we note the headwind of increasing postage costs for all online operators.

The greetings card market is not as sensitive to the macroeconomic environment, but there is some natural seasonality around major events (eg Christmas) and it is reasonable to expect that external factors (eg weather) can affect the purchasing of cards for events that do not have a fixed date. Products such as boxes of Christmas cards have been in long-term decline.

There would be a natural assumption that the younger demographic is moving away from purchasing cards, but CARD’s own customer survey shows 16–24-year-olds have been buying an increasing number of cards since 2017. As CARD diversifies into other higher-value and more gifting-related products, we believe it is reasonable to expect some greater macroeconomic sensitivity (ie customers trading down in tougher times, and vice versa). However, with low market share, there appears to be plenty of opportunity to catch additional sales without worrying too much about the cyclicality.

According to CARD’s FY24 annual report, the celebrations occasion market was affected by the wider macro trends in the past year, but the gifts and celebration essentials market was relatively resilient, with low-single-digit growth. CARD’s FY24 financial results indicate the company is performing well against this market backdrop and as it builds its presence in new product categories.

The senior executive team have joined CARD in the last few years, bringing a high level of experience in consumer-facing businesses and business transformation.

Chief executive officer: Darcy Willson-Rymer. Darcy joined CARD as CEO in March 2021. Prior to joining CARD, he was CEO of Costcutter Supermarkets Group for eight years, where he steered the business through a period of significant change, including the development of a new operating model and the introduction of a data and insights led business growth programme that realised a 20% sales uplift, and led the brand transformation of Costcutter. He was CEO of Clinton Cards from 2011 to 2012 and before that held a range of roles in international branded businesses, including managing director (UK & Ireland) of Starbucks Coffee Company and senior roles at Yum Restaurants International.

Chief financial officer: Matthias Seeger. Matthias joined CARD as CFO in May 2023. He was CFO of Ambassador Cruise Line from February 2022, having previously held the same position at Costcutter Supermarkets Group from September 2015 to September 2021, where he worked with Darcy. Previous roles include senior finance roles with Procter & Gamble in Germany, the UK, Belgium and Switzerland.

We see the main sensitivities for CARD as follows:

We have already highlighted management’s financial targets for the group as a whole and the main revenue streams in FY27. The targets, the progress against those targets in FY24 and the required CAGRs from revenue and adjusted PBT (company definition, which differs to our own definition, which excludes share-based payments) from FY23 and FY24 to achieve the targets are summarised as follows:

In descending order, the greatest absolute contributors to the FY27 target from the FY23 base were expected to be Partnerships, cardfactory stores and Online. Management was very clear that revenue growth would be back-end weighted within this timeframe. In relative terms, the greatest growth rates were expected for Partnerships and Online due to their smaller starting positions. Developing the international opportunities were expected to be the greatest contributors to the growth in Partnership revenue, with some contribution from ongoing growth in the UK. With respect to Online, the majority of the expected growth was from the new propositions that leverage the store estate (eg C&C).

The company’s strong performance in FY24 (see below), particularly for cardfactory stores and Partnerships, is evidenced by the lower CAGR for revenue required for FY24–27 than what was required from FY23–27. Conversely, Online’s growth needs to pick up significantly to get towards management’s targets.

In terms of the expected improvement in PBT margin to 14% in FY27, recovering back towards FY20’s levels of profitability, management anticipated greater incremental profitability from Online (27% of revenue) and cardfactory stores (25% of revenue) than from Partnerships (13% of revenue). This includes the assumption for Partnerships of more international partners using the fully-serviced model, which delivers higher revenues but also requires some merchandising wages and is therefore lower margin.

Our forecasts for FY25 and FY26 are shown in Exhibit 7 below. We forecast revenue growth of 7–8% in both years.

CARD’s FY24 results demonstrated strong year-on-year growth in revenue of c 10% to £510.9m and reported PBT of 25% to £65.6m, a margin of 12.8% versus FY23’s 11.3%. Adjusted PBT, which excludes a one-off gain on bargain purchase related to the acquisition of SA Greetings and the release of a COVID-19 provision, offset by the impairment charge for Getting Personal, increased by 27% y-o-y to £62.1m from £48.9m in FY23. Improvements in the commercial offer (ie range development, annualisation of targeted price increases, improved sales productivity per store and better freight costs) were helpful to profit growth, but foreign exchange, the increase in the national living wage and investment to drive future growth diluted profitability.

FY24’s overall revenue growth was driven by cardfactory stores and Partnerships, while the company’s combined Online activities declined year-on-year.

The gifts and celebration essentials products were the most significant contributors to cardfactory stores’ like-for-like growth of 7.7%, with like-for-like growth of 9.8%, but every day and seasonal cards also contributed good growth of 4.8%. The annualisation of targeted price increases from the prior year delivered around one-third of the overall like-for-like store growth. Range expansions were important to the growth, with notable highlights including soft toys (+42%), stationery (+63%) and pocket money toys (+44%). The momentum with range expansion will continue in FY25 and includes baby and pet gifting. The addition of 26 net new stores in FY24, and a similar number expected for FY25, suggests the new store openings are front-end loaded versus the target of opening 90 stores between FY23 and FY27.

The growth rates of the company’s two online brands were quite bifurcated year-on-year, and specifically in H224. Most importantly, cardfactory online’s FY24 revenue was flat year-on-year, but there was a notable change in momentum in H224, with year-on-year growth of 12.5% versus a decline of 13.1% in H124. Management highlighted that the positive traction has continued into FY25. Management attributes this to the investment made in the platform in recent years and the range improvements.

Partnership’s strong year-on-year revenue growth of 240% to £17m includes the first-time contribution from SA Greetings (acquired in April 2023) of £10.4m, the first (four) new stores in the Middle East (from a planned 36 stores over the next four years) and further growth from the roll-out across Matalan in the UK.

The company’s omnichannel credentials with customers appear to be improving, as just under 8% of orders from cardfactory.co.uk were collected in store, and, significantly, average basket values were more than double that of the average online order.

Continuous efforts to improve sourcing and targeted price improvements have helped to ensure that CARD’s product margin, which includes the purchase price of goods along with inbound freight, carriage and packaging, has been relatively consistent over the long term, in the high 60% range. The margin changes in more recent years post the pandemic reflected year-on-year changes in stock provisions and significant changes in freight rates through FY22. The improvement in the gross margin to 36.2% (FY23: 34.7%), which also includes property costs and store and warehouse wages, among other costs, reflects multiple drivers. On the plus side these included normalisation of freight rates and lower business rates. On the negative side, the drivers included price inflation on materials costs, the move to lower-margin non-card sales and the increase in the national living wage from April 2023. Approximately 50% of total goods for resale are purchased in US dollars, which is actively managed using short- and medium-term hedges.

As part of its updated capital allocation policy, the FY24 results saw the welcome return of dividends. Prior to the COVID-19 pandemic, CARD had a progressive dividend policy; ordinary dividends were typically covered between 2.0–2.5x by adjusted EPS. The ordinary dividends were complemented by special dividends in all years from FY15 to FY19. The last ordinary dividend to be paid was the interim for FY20 (2.9p per share) as well as a special dividend of 5p per share. The payment of dividends had been prohibited until elements of its debt (CLBILS and tranche ‘A’ of its terms loans) were repaid. The CLBILS was repaid in H224 and the final maturity date for tranche ‘A’ was repaid in January 2024, and therefore the earliest time a dividend payment could be considered was during the FY25 financial year. The declared dividend for FY24 of 4.5p is covered 3x by the company’s definition of adjusted EPS of 13.5p, which differs slightly to our own definition, which excludes share-based payments of 14.0p. Management has indicated a progressive dividend policy, with dividend cover of between 2x and 3x adjusted EPS. We assume lower cover of 2.5x in FY24 and FY25, placing our estimates in the middle of the guided range for dividend cover. Future annual ordinary dividends will be split 25%:75% between the interim and final dividends.

The capital allocation policy reflects the board’s commitment to balance investment in driving the growth of the business and delivering cash returns to shareholders. In addition, management may consider share buybacks.

Below we show how CARD’s cash flow and net debt has evolved since FY19, coincident with the adoption of IFRS 16. To get a better feel for the underlying trends in its cash generation, we show the key line items relative to revenue, to see what happened to every incremental pound of revenue.

The first and most important item to note is we expect improved relative free cash generation in FY25 and FY26 versus FY24. We would highlight our FY26 estimate for free cash after interest and lease payments of 8.2% is consistent with that of FY20, 10.4%, when we consider the differences in PBT margin: 12.2% in FY26 versus 14.4%. Therefore, if the company can improve the PBT margin to 14% in FY27, as guided, it is likely that relative free cash generation would be better than FY20.

At the 2023 CMD, management indicated that fixed asset investment would average £24m over the period FY23–27. The aggregate investment in tangible and intangible assets of £27.8m in FY24 was above this average as the second phase of the ERP implementation was completed and the net number of stores opened in the year was above the implied four-year average.

We include no debt repayments in our forecasts. The reduction in net debt excluding leases reflects the expected build in the company’s cash balance.

As CARD has an extensive store estate, the most significant part of its debt is lease liabilities. At the end of January 2024, the lease liabilities totalled c £101m. We expect the lease liabilities will be broadly stable over the next few years, as a growing store base is offset by lower lease costs per store as they are renewed.

At the end of FY24, CARD’s net debt excluding leases was £34.4m, the fourth consecutive year of debt reduction.

As part of the updated capital allocation policy, management wishes to maintain a strong balance sheet, to retain sufficient cash and committed facilities to ensure liquidity headroom throughout the annual operating cycle, maintaining adjusted leverage below 1.5x through the year. The company’s year-end financial position does not give a clear indication of its leverage through the year, as working capital peaks between the balance sheet dates, adding c £60–70m to the year-end figures. Using the period-end figures, CARD’s adjusted leverage was 0.4x at the end of FY24.

Following the end of the financial year, CARD refinanced its debt facilities, agreeing a new four-year £125m committed revolving credit facility with a syndicate of banks. The existing revolving credit facility (£100m, of which £26m was drawn at the balance sheet date) and Term Loan B (£18.8m at the balance sheet date) were repaid and cancelled.

Exhibit 8 shows that by the end of FY26 we expect CARD to have a net cash position excluding leases. This is obviously at a point in time that does not include the intra-year peak in working capital and therefore overstates the company’s average cash position through the year.

We look at CARD’s valuation from three perspectives: a DCF-based valuation; comparison versus an imperfect peer group; and relative to its own trading history.

Our DCF-based valuation for CARD is 180p per share, indicating attractive upside from the current share price. The key assumptions beyond FY27 are revenue growth of 2% per annum and a stable operating margin of 16%, and free cash flow/sales of just under 9%. We use a WACC of 9.5% (UK risk free rate of 4.4%, equity risk premium of 5.5% (source: Damodaran) and a beta of 1.25) and a terminal growth rate of 2%.

The sensitivity of the valuation to changes in the WACC and terminal growth rate are as follows:

A share price of 180p would represent a prospective P/E multiple for FY25 of 12.5x, which, as we can see from Exhibit 12, is back towards where the company used to be valued, and in line with the prospective valuations of other retailers highlighted below.

CARD does not have many direct quoted peers, as many of its competitors are either unquoted or the cards and gifts categories form a small part of their overall sales (eg the supermarkets). The only quoted pure-play card and gift retailer is Moonpig, but it is focused on online activities and also has a presence in the Netherlands. Therefore, below we show CARD’s financials and valuation relative to a number of other specialty retailers with a strong bricks-and-mortar presence as well as varying levels of online activities. All are annualised to CARD’s January year end.

The simple conclusion is that despite offering better expected revenue growth and enjoying higher profitability versus these companies, CARD trades at a discount using EV/sales and P/E multiples and offers a more attractive dividend yield.

With CARD’s good growth profile that is driving improving profitability and cash generation, below we show CARD’s prospective EV/sales multiple over the long term and compare it with its historical high, average (quoted on chart) and low multiples. We exclude IFRS 16 lease liabilities from the calculation of net debt to make the comparison over the long term more valid.

We believe that CARD’s prospective valuation looks low versus its historical valuation given its expected profitability.

Switching our attention to P/E multiples, we can see similarly low prospective multiples for FY25 and FY26 versus prior multiples. We exclude FY21 as the company reported a loss during the height of the pandemic.