The Card Factory (LSE:CARD) share price has taken quite a tumble over the past few weeks. Since mid-May, the company has seen its stock drop from 95p to around 68p today. That’s nearly a 30% decline in a relatively short space of time.
Taking a step back, the Card Factory share price has been performing admirably. After all, over the last 12 months, it’s up by nearly 90%. But the question remains, what caused the recent drop? And is this a buying opportunity for my portfolio?
Why did the Card Factory share price crash?
Like many retail businesses, Card Factory was hit hard by the pandemic. Being a non-essential business, its shops remained closed to customers for most of 2020. And even though it has some presence in the online space, fierce competition from the likes of Moonpig created quite a challenging environment for the operator.
With revenue severely impacted and debts to repay, the financial health of Card Factory had significantly weakened. This appears to have lead to a build-up of uncertainty among investors.
That was until February this year when the UK government unveiled its roadmap to ease lockdown restrictions. With a reopening timeline in place and confirmation from the management team that waivers on its debt covenants had been secured until March, the Card Factory share price unsurprisingly soared. So why did it crash again?
In order to remain afloat, the company successfully refinanced its debt, raising £225m of capital. Taking on additional debt has further leveraged the firm. But it’s also provided some much-needed breathing space until September 2023.
However, investors don’t seem particularly happy about this agreement. And after taking a closer look, I can see why. To keep up with its repayment plan, the firm intends to raise an additional £70m by issuing new shares.
Based on the £293m market capitalisation before the recent crash, the proposed equity offer would create a dilution effect of around 24%. So seeing the Card Factory share price drop by a similar amount isn’t surprising to me.
Moving Forward
Seeing a dilution effect of this magnitude isn’t a pleasant sight. But, over the long-term, it may not matter all that much. Covid-19 has forced many companies to adapt. And in the case of Card Factory, it finally started fleshing out its underdeveloped e-commerce revenue channel.
In fact, looking at the most recent figures, online sales grew by 64% last year. What’s more, these sales are far more profitable. After all, it’s not paying rent on a high street plot, nor any direct labour costs. The latter already proved to be troublesome in 2019 when the national living wage increased, leading to a profit warning for investors.
As its online sales channel is further fleshed out, I’d expect to see its net profit margin steadily improve, taking the Card Factory share price with it. Overall, I believe the company can return to its pre-pandemic levels. But the road to recovery may take several years. And personally, I think there are better investment opportunities elsewhere.
