Things are going from bad to worse at struggling retailer Card Factory (LSE: CARD), which is down more than 20% after today’s update alerted markets to a “challenging” and “softer than anticipated” Christmas trading period.
Management said the “general election and weak consumer sentiment ensured that the long-running trend of declining high street footfall was maintained”, filling investors with foreboding. The Card Factory share price has now halved in five years.
The £376m group still hails itself as “the UK’s leading specialist retailer of greeting cards, dressings and gifts”, but it’s in a tough sector. Yet has the market gone in too hard today?
Like-for-like sales fell 0.6% in the 11 months to 31 December, although total group revenue rose 3.6% as new stores opened. Cardfactory.co.uk is gaining ground, with online sales up 14.8% year-to-date, boosted by “enlarged gift and party ranges and increased customer awareness”. That growth is slower than 59.1% last year, but is still good and a new platform should further boost this in 2021 by enabling click-and-collect and in-store ordering.
Management has also fought back by boosting average transaction value, opening a raft of new stores, and rolling out its agreement with Aldi to supply a range of everyday cards to 440 UK stores. This month, it rolls out its card offering to The Reject Shop‘s 360 stores in Australia.
The “depressed sterling valuation” has also weighed on Card Factory, but at least that is now changing. High cost inflation, especially wages, remains a worry, and management says efficiency opportunities are finite, but it will present a “refreshed strategy” in April.
This stock is cheap, now trading at just 8.1 times forward earnings, with a forecast yield of 9.8%, covered 1.3 times. However, there is unlikely to be a special dividend this year, and the payout will be reviewed in April. Brave bargain hunters may be tempted, but with Amazon operating on its patch, I’m wary.
Personally, I’d be looking for a stock in a healthier sector, and I am more bullish on housebuilders than retail. I remained bullish during the post-EU referendum slump, when the sector crashed on fears the uncertainty would hammer the housing market. I didn’t buy that theory, given the massive undersupply of property.
History has absolved me, with FTSE 250 listed Redrow (LSE: RDW) up 40% in six months, and 167% over five years, as it cannot build houses fast enough to meet demand. Following December’s election, it should get a further boost from plans to reduce planning red tape, and from an anticipated economic revival.
In a further tailwind, interest rates and mortgages are set to stay low or even fall further. Yes, Help to Buy is now on borrowed time, but demand is just too great for that to be a major concern.
My big worry is that Redrow’s earnings looks set to slow. After routinely posting double-digit growth, the current year sees a forecast 1% drop, and growth of just 2% in 2021. However, the Redrow share price trades at just 8.1 times forward earnings, despite its spectacular growth, while the 4.2% forecast yield is covered 2.9 times by earnings. It also boasts £124m of net cash. House price growth is holding up too. I’d buy it.
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of Card Factory. The Motley Fool UK has recommended Redrow. 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.