Investors are beginning to take talk of inflation very seriously now, it seems. Just yesterday, the greetings card retailer and penny stock Card Factory (LSE: CARD) saw a 15%+ drop in price after its trading update. From what I could see, the update had a number of positives. However, it did raise one issue: inflation, and particularly how this could impact its margins.
Profit warning drags down the share price
A predicted hit to profits is always an indicator that the price could fall. And when it is coupled with all the ways in which price rises can impact business, I think the potential problem appears bigger. The company talked about increasing freight cost, the impact of inflation on costs of staff and utilities, as well as bigger investments as the reasons why profits could fall. To counter this, it plans to increase prices and focus on business efficiencies, which could reduce some of the impact of inflation, but not entirely.
The headline inflation numbers have been starting to look like a bigger issue of late before this update. The UK’s inflation rate came in at 5% on a year-on-year basis for November 2021. The next number due soon is slated to be even higher. A number of companies have talked about inflation in their trading updates. But none I have come across have talked either in as much detail or have expected such a significant reduction in profits because of it.
Has the market overreacted?
While I do not want to take away from how seriously Card Factory will be affected, I believe that there might have been a bit of a market overreaction to the update. There were some positives to it too. Sales for the 11 months ending 31 December 2021 were ahead of its expectations. While they were still lagging behind pre-Covid 19 numbers because of store closures earlier in the year, its retail footfall numbers were also ahead of that for the country as a whole. And its online revenues have improved as well.
What’s next for the penny stock?
This suggest to me that all if far from lost for the stock. In 2022, I think it is fair to expect the Covid-19 situation to come even more under control. Also, with the economic recovery under way, demand for non-essential consumer products could continue to improve. The Card Factory share price is still way below its pre-pandemic levels. In fact, at the start of the pandemic it dropped to penny stock level. Even though it has made significant gains since the worst of the pandemic, it is still priced at sub-£1.
Of course because of an increase risk of inflation, I think a full recovery in its financials could be delayed. But I think it is only a matter of time before it does happen. I would still buy Card Factory stock.