Shares in gifting retailer Card Factory (LSE: CARD) have doubled over the last month. But this UK share is still worth nearly 20% less than it was a year ago. However, with lockdown set to end, I reckon there could finally be light at the end of the tunnel for this firm.
Card Factory’s share price has risen by 50% since last week’s financing update. This suggests to me the market expects a solution to Card’s debt problems quite soon. I agree. I’ve been taking a fresh look to see if it’s the right time to buy this UK share for my portfolio.
Online turnaround
In my opinion, Card Factory had two problems at the start of the coronavirus pandemic. One was that the group’s budget offering was geared towards store sales, not online. Although it has a web presence, I think it’s fair to say the company’s slipped behind the competition online.
Events over the last year have forced management to play digital catch-up. January’s trading statement showed Card Factory’s online sales rose by 137% during the 11 months to 31 December, compared to the same period in 2019.
I’m pleased with this. When stores reopen, I expect a strong return to normal for this UK share.
Debt worries
Card Factory’s second problem is, in my view, it has too much debt. This might have been manageable without the third national lockdown. But, on 14 January, management issued a statement saying it expects the company to breach the terms of its loans.
The company has been in discussions with its banks since then. So far, they’ve agreed to support the business until trading returns to normal. But although stores aren’t set to reopen until April, I think the company is getting closer to a permanent solution.
Last week, Card Factory said it is “engaged on a plan to refinance the company.” A further update is promised in due course. In my view, this most likely means a share placing is on the way.
By issuing new shares, Card Factory should be able to raise funds to reduce its debts. The business will then be able to reopen with a more solid financial footing.
What I’m doing with this UK share
I like Card Factory’s business and I expect a solid recovery over the next 12 months, or so. But I’m not considering buying the shares until the group’s refinancing has been completed.
Debt obligations always take legal priority over equity (shares). My guess is that, in the next few weeks, Card Factory will issue a substantial number of new shares, probably at a discount to the current share price.
For me, it makes more sense to wait until after the refinancing details are made public. Until then, I can’t easily estimate earnings per share or other valuation measures.
In other words, I don’t know if Card Factory looks cheap or expensive at the moment. I don’t want to overpay, so I’ll wait until I can form a view on this.
