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The Card Factory share price just jumped 10%! Should I buy now?

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The Card Factory (LSE:CARD) share price surged 10% today on the back of its latest earnings report. The stock is still trading firmly below pre-pandemic levels. But this latest momentum is certainly pushing it in the right direction. And over the last 12 months, shareholders have enjoyed an impressive 76% return. So let’s take a closer look at what this business has achieved to see whether I should be considering it for my portfolio.

Impressive earnings push the Card Factory share price up

For those unfamiliar with this company, Card Factory is a UK card and gift retailer with a network of over 1,000 stores across the country. Needless to say, 2020 did not exactly create the most favourable operating environment. With non-essential stores having to temporarily close, Card Factory’s revenue stream was heavily disrupted, causing its share price to collapse last year.

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Fortunately, with the relatively rapid rollout of Covid-19 vaccines, the retail environment has improved. And with vigorous investments being made into the online side of the business, Card Factory continues to make a steady recovery. Looking at the latest earnings report, like-for-like store sales are actually close to pre-pandemic levels.

That’s quite impressive given that total transaction volumes are still 20% lower than in 2019. In other words, there are still fewer customers in its stores, but those who venture in are spending more – around 22.5%, according to management. At the same time, the group’s financial strength has also improved. As of the end of October, net debt stood at £108.4m, excluding deferred rent and taxes. By comparison, this adjusted figure was around £142.5m a year ago.

Overall, it seems this business is getting back on track. So I’m not surprised to see the Card Factory share price rally this morning.

Taking a step back

As exciting as rising sales and falling debt are, Card Factory still has a long road ahead. If anything, the pandemic displayed perfectly the dangers of being reliant on a single channel of income. Management has since begun transitioning the business into a multi-channel retailer as a consequence. The expansion of its online offerings is a step in the right direction, in my opinion. However, the firm has some fierce competition to fend off. Moonpig is a dominant force in the online card retail space. And Card Factory may struggle to win market share from its competitor.

Meanwhile, liquidity continues to look relatively weak. While net debt has fallen, the limited amount of spare cash on the balance sheet does suggest management will struggle to meet its short-term obligations. If the company needs to raise additional capital to keep the lights on, net debt may start climbing again. Or if the business turns to shareholders, equity dilution could be on the horizon. Either way, it would likely hurt the Card Factory share price.

Final thoughts

Overall, my opinion of Card Factory and its share price potential has improved since the last time I looked at it. But I’m still cautious about its short-term financial health. As such, I’m keeping this business on my watchlist for now.

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Zaven Boyrazian 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.

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