Card Factory (LSE:CARD) is one of many businesses that took a major hit during the pandemic. And Its share price took a 60% tumble over the course of 2020. But since January this year, the Card Factory share price has been on fire. So much so that over the last 12 months, it is up around 105%.
Why is it now surging? What caused it to fall in the first place? And should I be adding the stock to my portfolio? Let’s take a look.
Why did the Card Factory share price crash in 2020?
During the early days of the pandemic, lockdown forced Card Factory to close its stores around the UK. Its share price crashed by over 60% in a matter of weeks. And based on its interim earnings report, I can see why.
Total revenue fell by half, profitability went out of the window, and dividends were suspended. However, there were some positives — specifically, online sales grew by an impressive 64%.
Before the pandemic, this revenue source remained mostly underdeveloped. Consequently, while this surely helped mitigate the impact of Covid-19, it wasn’t able to prevent the business from making a loss. By comparison, its online competitor Moonpig thrived throughout 2020 and saw its bottom line grow by 125%.
Why did the Card Factory Share price double in 2021?
In February, the UK government announced its plans to begin easing lockdown restrictions in England. Under the proposed roadmap, non-essential stores, like the ones belonging to Card Factory, are set to reopen in April. The same is true for Wales.
This is undoubtedly fantastic news for the card and gift retailer that currently has over 1,000 stores around the UK waiting to reopen their doors. It may take a while for the business to return to pre-pandemic levels. But this latest development does give investors hope to see the revival of the stock’s famous 18% return on capital employed and its 5% dividend yield.
Should I buy now?
While the pandemic may soon be coming to an end, Card Factory has many challenges to overcome. Personally, I would like to see it focus on expanding its online operations, even after the lockdowns have ended. Let me explain why.
A quick glance between Moonpig’s and Card Factory’s income statements reveals a glaring difference in the level of profitability. Card Factory’s operating profit margin is a mere 7.6% versus Moonpig’s 21.7%. That’s quite a substantial difference that seems to be caused by the former having a network of physical stores.
Over the years, this network has helped develop Card Factory’s brand. But it also introduces substantial operating expenses such as rent and staff salaries. The latter proved to be particularly troublesome towards the end of 2019 when the company issued a profit warning following an increase in the national living wage.
What’s more, the firm now has a lot of additional debt to contend with. And is already in breach of previously established debt covenants. The banks have agreed to provide waivers and support through refinancing options, but this only delays the problem. If the government decides to change the current roadmap, it could hurt the business and its share price.
Overall, it does look like it’s on track for a recovery over the year. But for now, I’d rather wait and see before buying.
