Card Factory (LSE: CARD) shares have been rising over the past month, although the stock still trades on a P/E of 4x. This is a bargain on the surface, but I should stress that it’s cheap for a reason. I’m tempted to dip my toe in, but there are risks involved. For now, Card Factory shares aren’t for the faint-hearted and I’m not brave enough to buy them today. So I’ll monitor the stock.
I have a few concerns about the company. These include the minimal online presence, its debt level and liquidity.
Online presence
I think one of the problems with the cards and gifts retailer is its minimal online presence. The company is heavily reliant on its retail stores, which have had to temporarily close due to the pandemic. In fact, Card Factory has over 1,000 retail stores across the UK and Ireland.
In my view the company’s online presence has slipped behind some of its competitors. Card Factory has had to play catch-up and in July 2020 it relaunched its website.
Since then, online sales have performed very strongly and I’d expect this to continue. At least Card Factory has now realised that it needs to adopt a more multichannel-focused approach in order to face the future.
But I should add that the competition is tough from the likes of Moonpig, which recently came to market. This is a pureplay online cards and gifts retailer, which has performed well during the pandemic. Yet Card Factory’s brand and value proposition may resonate with customers, especially when the stores can reopen.
Debt pile and liquidity
Another reason why I’m cautious over Card Factory shares is its high level of debt, which at some point will have to be repaid. On January 14, it announced that while in the short term, cash flow could be covered by its £200m bank credit, it expects to breach its loan terms. I found this somewhat alarming.
Since then, it has confirmed that it’s in discussion with the banks, which have given it some leeway. Waivers were granted until the end of February but now this has been pushed until the end of March.
I reckon the banks will continue to give Card Factory some breathing space until shops can officially reopen and it can start to generate some revenue from its retail stores.
For now I think there’s enough liquidity to weather the storm. Card Factory shares have rallied on this short-term relief. But if lockdowns persist, I reckon the financial position will become much worse. This uncertainty makes me uncomfortable and hence I’ll continue to watch the stock for now.
Card Factory has said that it expects to refinance the company and a further update will be issued in due course. The shares have been rising in the hope of that refinancing. So what does this mean? Given what other victims of the pandemic have done, I expect a share placing could be on the cards. The funds raised could reduce the debt pile and build the company’s online presence.
I think Card Factory shares are a possible recovery stock but I’m not so bold to buy yet. I’d like to see more information on its refinancing before taking the plunge.
