Card Factory collapse an opportunity?

Card Factory is a stock rarely short of friends after returning almost £250 million to shareholders since its IPO in May 2014. Fund manager Neil Woodford and a host of City analysts have been drawn to the greetings card and gifts retailer by its strong record of cash generation, and vertically integrated retail business model.

How the Wakefield-based chain needs their continued support today after a second profits warning in the space of four months, sending shares 16% lower to a level last seen shortly after its stock market flotation.

The chain is still growing underlying sales, but this is being driven by lower margin categories such as gifts and dressings. With the group continuing to encounter import cost headwinds and wage inflation, earnings for the year to the end of January will be between £93 million and £95 million. This compares with last year's £98.5 million and a consensus forecast of £97.3 million.

Despite the downgrade, chief executive Karen Hubbard believes the retailer traded well throughout a tough Christmas period and pointed to the company's market leading position, which continues to provide a significant competitive advantage backed by a 900-strong store estate.

Hubbard, who became CEO in April 2016, responded to today's share price slump by picking up £48,741 worth of stock at an average price of 239.1p.

She continues to have the support of Investec Securities analyst Kate Calvert, who described the retail business as "robust".

Prior to today, Calvert had a 'buy' recommendation and 320p price target. She added: "Valuation does not reflect the strength of business model, strong cash generation, an advantageous lease structure and low capex."

With its in-house design team and printing facility and central warehousing capacity of over 360,000 sq. ft, the group is able to operate with significantly reduced costs compared with its rivals.

Strong cash balances meant Card Factory was able to announce in September a special dividend of 15p a share worth £51.2 million to shareholders, on top of a 3.6% rise in the interim dividend to 2.9p.

It pledged at the time to retain its progressive dividend policy and to consider returning further surplus funds to shareholders.

Peel Hunt recently named Card Factory as one of its top income stock picks for 2018, with a target price of 400p.  

Analyst Jonathan Pritchard said: "Card Factory's position within the greetings card sector is enviable. It is the only vertically integrated player and this has allowed it to build up a major value-for-money lead over the competition.

"Other card retailers are closing stores whilst Card Factory opens them."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.