“Cardfactory - The first choice to celebrate all life’s moments”
Cardfactory (CARD) is the UK’s leading retailer of cards, gifts and celebration essentials, with an estate of over 1,000 stores across the UK & Ireland and supply through over 900 partner and franchise stores mainly through Aldi in the UK and The Reject Shop in Australia. Their products are high-quality, yet through their vertically integrated design, production and omnichannel retail model, can be offered at significantly lower prices than competitors.
CARD trades at 2.7 EV/EBITDA and 3.3 EV/FCF, which comes across as very cheap. CARD also happens to be the only vertically integrated business in the greeting card market which makes it absolutely dominant by being able to react to demand and boast the widest quality selection at the lowest prices. Even though the market isn’t projected to grow much, CARD still manages to capture value by taking market share every year from their competitors. 1 of 3 greeting cards sold in the UK are sold by CARD, and the company has been voted as the best value for money retail brand in the UK 6 years consecutively! Revenues have also grown every full trading year since the IPO in 2014 and the capital-light business model bodes well for future growth.
Outlook
One of the most important question to ask when investing in consumer discretionary businesses is: How will the demand for products offered develop in 5-10 years time? The UK greeting card market, valued at £827M, isn’t exactly a growing one and has in fact declined for a while. I however believe that buying greeting cards is a nice tradition and that people will continue to do so for decades to come. In their latest annual report CARD showcase some FY22 highlights such as 80% of UK adults bought a greeting card vs 73% for FY21, 19.9 cards bought per UK customer per year, 14% YoY growth in card volume for UK 16-24 age group and impressive three-digit YoY growth for special occasion cards (mothers/fathers day, weddings, valentine’s day).
My opinion is if you are celebrating someone in person you will 10 out of 10 times gift them a personalised physical card rather than an e-card. So given CARD’s dominance within the greeting card market I expect this segment to continue growing with single digits not because the volume of sold greeting cards is growing but because of the market share that they continuously capture. In their latest 10-K, CARD however states that they now are addressing the £13.4B UK celebration occasions market, signalling that they see more growth possibility when combining card offers with other gifts such as personalised alcoholic beverages, beauty gifts, books, foods, sweets and much more. They also offer a large selection of gift wrapping and are the no.1 destination for helium balloons.
Their new strategy called “Opening our new future” clarifies the focus on the broader celebrations market as well as an international expansion opportunity. CARD conducted extensive analysis on the international landscape showing that there is a £8B opportunity in 7 key markets. How they are addressing that is not yet clear, as they might pursue the familiar partner model or even open up their own stores.
I would say there is only one disruptive competitor for CARD within the UK market, Moonpig ($MOON.L), who offer quality products but at a much steeper price point. They also specialise in the digital market, which saw them benefit massively from Covid and now has the company priced at a 23 PE ratio vs CARD’s 6,7. An interesting but quite far-fetched idea would be an acquisition for CARD, if it can be financed logically, once Moonpig’s valuation readjusts to post-Covid times. Other than the digital market, I don’t see Moonpig disrupting on CARD’s holy premises; dirt-cheap, broad range and wide reach.
Financials
CARD owns its production facility and leases all their stores. Lease liabilities are £105M of which a quarter are short-term, but with a (net debt incl. leases)/FCF of 2.6 CARD is well positioned to cover especially when cash flow is quite predictable and robust. Net working capital is negative £55M as their inventories are financed by a supplier. Net debt excluding leases was £57,2M for FY23 and leverage (ND/EBITDA) was at 0.5x coming in at the low end of expectations (0.5x-1.5x).
Managements updated target is £650M in revenue by FY27 (compare to previous target £600M by FY25) with 14% margins supported by their capital investment plan £24M p.a. This seems doable, but the fact that it could take double the time to reach the target and still do very well is a good sign. CARD had a solid track record for dividends pre-covid which for now is halted. The board however wants to reinstate a dividend at the end of FY24 based on a targeted dividend cover of 2-3x of post tax profit. As CARD is highly cash-generative and generally has low Capex one could expect a sizeable amount of future cash flows to go towards dividends, possibly even a double-digit yield.
Rough valuation
Some assumptions:
Linear revenue growth up until FY27 when £650M in revenues
Profit before tax margins of 12% for FY24 and 25 and 13% for FY26 and 27
Tax rate of 25%
Steady leases, d&a, capex
14x PBT multiple
This would see a target price of 286p as of FY27 and this is including dividends. Last close is 103p so this would see a 63% margin of safety and an annualised return of 23% which sounds too good to be true. However this is medium to bull case and dividends are not yet reinstated. In the bear case we could still enjoy our dividend check while seeing slower growth to the principal. To conclude I see the current price as relatively cheap and will be monitoring it closely in the future.
Conclusion
One thing that bothers me is the marginal insider ownership. I understand that management is relatively new and also somewhat inexperienced in CARD’s business and operations. However, I am convinced that they are capable of fulfilling their targets and providing shareholders with great value.
The business itself I think will continue growing slowly but steadily, as it has in the past. If they reinstate the dividend in January 2024 and continue capturing market share without disturbance from any disrupting forces I see this as a great long-term play.
Thanks for reading, any feedback and all comments are very welcome as I still am quite new to the investing scene!
NOTE: This does not in any way constitute investment advice and is for educational purposes only. This is not a BUY or SELL recommendation, this is my own opinion. Any investment decisions should not be based on Smart Micro Caps articles. I encourage all readers to do their own due diligence and contact authorised professionals for advice.