Card Factory (LSE: CARD) shares are on the rise. The stock has increased over 15% in the past month and 120% during the last 12 months. Previous performance is not an indication of future results, of course, but the rises are impressive nonetheless.
So what’s behind the share price rally? I see two main reasons, which I’ll be discussing here. But despite Card Factory shares having a strong run, I’m still cautious on the stock. For now I’ll continue monitoring the share price.
#1 – Liquidity update
Card Factory suffered in the pandemic and earlier this year there were concerns over its liquidity position. It announced in January that it may breach its loan terms, which set my alarm bells ringing.
Since then Card Factory has been giving investors regular liquidity updates. Last week, the company provided another one of these announcements in a rather short statement. I was expecting more details to base my investment case on, but I was sadly disappointed.
Card Factory indicated that it continues to have “constructive discussions” with its banking syndicate. This “supportive” banks have “provided further waivers in respect of anticipated covenant breaches through until 30 April 2021″.
In other words, the banks have given Card Factory leeway with its loans until the end of April. I think it’s worth highlighting that these financial institutions had previously given the company breathing room until the end of March. So the banks have kicked the liquidity issue down the road, just a little.
At this point in time, this vague liquidity announcement doesn’t give me much information. I think the banks are still waiting for the shops to open on 12 April to make a full assessment.
With no extra clarity on refinancing, for now I’ll adopt a wait-and-see approach with Card Factory shares.
#2 – Reopening
The second reason why I think Card Factory shares are soaring is due to the reopening of its stores on 12 April. Prime Minister Boris Johnson confirmed over the Easter weekend that the UK is on target to reopen certain parts of the economy next week.
This is good news for Card Factory shares. The company has over 1,000 stores and the reopening means that it can resume trading from them. I don’t expect sales to recover immediately to pre-coronavirus levels, but at least it’s a start.
The hope of returning to some kind of normality after lockdown has given the share price a boost. But I question how long this can last, even though I think in the short term that Card Factory shares will rise on the reopening trade.
My view on Card Factory shares
What I’m really waiting for is a realistic long-term plan for Card Factory. So far, the company has been addressing the short-term issues.
As I previously mentioned, I would like more information on refinancing in order to make my investment decision. I think it’s worth highlighting, that this depends on the performance of the shops when they reopen.
I’ll have to wait to see if the firm’s value proposition still resonates with customers, especially after people have become accustomed to ordering online. This is why I’ll be watching Card Factory shares like a hawk over the coming months.
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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has recommended Card Factory. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.