The Motley Fool

Should you avoid Card Factory plc after today’s 20% decline?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The share price of specialist retailer of greeting cards and gifts, Card Factory (LSE: CARD), has fallen 20% today after it released a trading update for the 11 months to 31 December 2017. The main reason for the company’s share price fall is that it has warned on profit for both the current year and the next financial year.

However, its sales performance over Christmas was relatively robust, and it remains highly cash generative. Could this therefore be an opportunity to buy it? Or should investors avoid the company at the present time?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Solid trading performance

In the year to date, Card Factory has delivered sales growth of 5.9%, with store like-for-like (LFL) sales up 2.7%. Both of these figures represent improvements on the prior year, with the company’s performance over the key Christmas period being relatively robust.

During the year, 48 net new UK stores were opened, with 50 net new stores expected by the end of the year. The company’s online sales remained strong, which shows that consumer spending levels remain higher than many investors had anticipated. Sales have largely been driven by lower margin non-card categories, such as gifts and dressing, with card sales stable year-on-year. With the company having a pipeline of new store opportunities, its sales figures could continue to move higher.

Potential difficulties

While Card Factory’s sales figures have been relatively robust, its margin pressures have remained significant. Its costs continue to rise and when coupled with the change in sales mix towards lower-margin gifts, it means that EBITDA (earnings before interest, tax, depreciation and amortisation) are set to be between £93m and £95m for the current year. This is lower than the previously expected figure of £98.5m.

Next year is set to be a similar story. The combined impact of foreign exchange and wage inflation is expected to result in between £7m and £8m of additional costs in the 2019 financial year. While some of these costs can be mitigated, it seems unlikely that there will be significant growth in profitability next year.

Potential turnaround opportunity

While today’s trading update is disappointing, Card Factory could deliver a successful turnaround. It expects cost headwinds to gradually ease unless there is a dramatic shift in the value of sterling. And with sales figures being robust and the company having a major new store pipeline, its performance over the long run could be impressive.

Certainly, consumer confidence in the UK could come under pressure as Brexit moves closer. Higher inflation may cause consumers to spend less on non-essential items, which could cause further difficulties for businesses such as Card Factory. However, with a price-to-earnings (P/E) ratio of just 11.6, the stock seems to offer a wide margin of safety. This suggests that the stock market has already factored-in the potential difficulties ahead, and it could be worth buying as a turnaround opportunity for the long term.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Peter Stephens owns shares in Card Factory. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.