After falling 21% in a day, is the Card Factory share price an unmissable opportunity?

Stephen Wright thinks the Card Factory share price falling as sales continue to grow doesn’t make sense. But is he buying the FTSE small-cap stock?

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FTSE All Share constituent Card Factory (LSE:CARD) saw its share price fall 21% on Tuesday (24 September) after the latest trading update. Sales were up 5.9%, but earnings per share fell from 5p to 3.1p on higher staff and freight costs. The downward trajectory in the price continued on Wednesday, albeit much less sharply.

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Lower profits are never a good thing, but I’m surprised by the stock market’s reaction. Mostly because I think investors had some decent indications that something like this might be coming.

Why the sudden reaction?

In the company’s Annual Report in April CFO Matthias Seeger said the following:

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We expect to see continued growth in FY25, driven largely by same-store-sales … Whilst the cost-of-living crisis has eased, inflationary challenges remain – particularly in wages, freight, and energy… We are well placed to manage these challenges and remain confident in offsetting cost inflation over the course of the year through ongoing improvements in efficiencies and productivity… Profit before tax growth in FY25 is expected to be weighted to the second half, reflecting phasing of planned investments and inflation recovery actions.

In other words, things have been going almost exactly as Card Factory’s management anticipated. The main challenges the company has faced have been the ones it expected. 

On top of this, management reiterated its confidence in the firm’s ability to offset the effects of inflation in the next six months. And it maintained its profit guidance going forward.

All of this means it’s mysterious why the stock reacted so violently. A 21% fall due to results that were entirely in line with management’s guidance might look like a buying opportunity.

So… should I buy the stock?

I’ll get right to it: Card Factory shares look cheap — and I think they are cheap. But I’m not buying them. I think the business has some difficult ongoing challenges to contend with.

As the company says, a key part of its attractiveness to customers is the value it offers. I like that and I think the appeal of low prices is likely to be enduring, but it makes inflation a big issue.

Offering low prices makes it difficult for Card Factory to offset the effects of inflation by raising them. As a result, it has to either cut costs elsewhere or face the prospect of eroding margins.

Management is positive about its ability to do this in the near term, but I think the National Living Wage is only going one way. That makes it a long-term recurring issue for the company.

I don’t see what underpins its capacity to offset the effects of inflation over the long term. And the change in the firm’s margins over the last 10 years does nothing to make me more confident.

Card Factory Operating Margin 2014-24


Created at TradingView

In general, Card Factory’s operating margins have been contracting since 2014. A recovery from the pandemic is still ongoing, but margins are still some way short of 2020 levels.

Low prices

I’m a big fan of businesses offering great value to customers. But this only works when it has an unusually good ability to control its own costs. 

Maybe I’m wrong, but I don’t see this with Card Factory. So I’m going to pass on this one – despite my view that the market’s reaction is unjustified.

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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