Card Factory — Unbending

Card Factory — Unbending

Card Factory is a deep value retailer, offering a core product at 99p that retails for twice that at high street competitors. Despite the wide price gap, management is adamant that it does not need to raise prices to maintain profitability, with a range of actions in progress to optimise both top line and cost structure. The share price has fallen steeply, but this could present an opportunity as there are a number of potential catalysts.

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Written by

Card Factory

Unbending

Retail

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28 September 2017

Price

278.5p

Market cap

£951m

Share price graph

Share details

Code

CARD

Listing

LSE

Shares in issue

341.5m

Business description

Card Factory is the UK’s leading specialist retailer of greeting cards and related gifting items. It operates from 895 stores across the UK, and has an established online presence. Its key focus is to produce a wide range of quality cards and products at exceptional value.

Bull

Market leader.

Cash productive.

Deep value with price potential in reserve.

Bear

A discretionary purchase.

Not yet addressing online competition.

Cost structure suffers from weak sterling.

Analysts

Paul Hickman

+44 (0)20 3681 2501

Neil Shah

+44 (0)20 3077 5700

Card Factory is a deep value retailer, offering a core product at 99p that retails for twice that at high street competitors. Despite the wide price gap, management is adamant that it does not need to raise prices to maintain profitability, with a range of actions in progress to optimise both top line and cost structure. The share price has fallen steeply, but this could present an opportunity as there are a number of potential catalysts.

Interim results: Coming to terms with cost pressure

Card Factory, while market leader, is coming to terms with higher costs. PBT is down 5% at £26.3m. Footfall declines have been compensated by higher average spend as it expands its non-card range, to leave a creditable 3% like-for-like sales growth. But gross margins have been hit by currency, down 1.3 percentage points at 27.0%. And after the National Living Wage, wage costs rose 10.7% against revenue up only 6.1%. This new cost structure is unlikely to reverse anytime soon.

Standing firm against price increases

Despite cost pressure, management is resistant to price rises, choosing to retain its deep value appeal. Its core price point is 99p, which gives it ‘clear blue water’ against high street competitors, though less against supermarkets and online players. Management believes that there are sufficient opportunities to be addressed, both on sales and costs, to make the price option unnecessary.

The fightback: A range of actions

The sales strategy is aimed at increasing the range that customers will buy, including non-card gifts. The estate is growing, with 30 openings in H1 taking it to 895 and with an encouraging boost from retail parks. Online remains small, though growing c 30%, with opportunity further out. And management is mining efficiencies such as rent and rate cuts, streamlining internal tasks, and LED lighting. It is also refining supply chain management including some vertical integration, and EPOS will soon be in all stores, raising visibility on customer behaviour.

Valuation: Depressed but not without catalysts

The shares, down 21% post the results, trade at c 22% P/E discount to WH Smith, adjusted to January 2018. That appears to reflect slowing earnings growth adequately. Catalysts to share price recovery could be above-trend sales growth, from mix if not directly on price, advances in online share, or a boost from larger stores on retail parks. In addition, given management has signalled that the special dividend is subject to review, further cash distributions would likely be positive.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/16

381.6

82.0

19.1

23.5

14.6

8.4

01/17

398.2

85.1

19.8

24.1

14.1

8.7

01/18e

425.3

83.2

19.4

24.3

14.4

8.7

01/19e

451.5

86.7

20.3

9.9

13.7

3.6

Source: Card Factory (underlying historic), Bloomberg (forecast: recent consensus)

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2017]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Consumer

La Doria — A good summer

La Doria’s H117 results demonstrate that the business is solid: despite a tough macroeconomic backdrop in several markets, revenues were up 1.9% during the period, or an impressive 7.4% in constant currency, mainly driven by volumes. The important factor is the outcome of the seasonal 2017 tomato campaign, and – as expected – lower national tomato production, together with the sector destocking following the decrease in production in southern Italy in 2016, resulted in more successful customer negotiations this year, and hence agreed price increases for 2018. As a reminder, this should result in a margin recovery from Q417, when the new contracts start to kick in, and will mainly benefit FY18 margins. We raise our forecasts to reflect the improved outlook and also roll forward our DCF. Our fair value moves to €15.54/share from €12.49.

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