Member Info for Billybob15

BanburyBoy - I think you have overstated cash generation in the prior period as you are looking only at financial debt. I believe you have to deduct the deferred rent and Vat which were built up (not paid) over that quarter.

I agree with you Wiscos. The trading update wording was odd. It could have been - trading has beaten expectations, the business has generated £61m of cash in the past 11 months and we no longer expect (subject to no further lockdowns) to have to raise £70m of equity. Instead they talk about a low net profit figure and say that over the last TWO years (FY20 to FY22) the cost base has increased by £30m. It almost seems designed to spook. I do hope the chair of the remuneration committee reads these posts as perhaps mgmt were trying to achieve lower targets for their LTIPs?

For what it’s worth SimplyWallSt reduced their view on Fair Value of Card Factory shares from £1.04 last week to £0.96 after the trading statement - which implies they are 44% undervalued. I think they and Liberum (£1.10)are in the right ball park and expect the shares to recover towards those levels over the next six months.

I have just added another 50k shares to my holding at 53.70p. Crazy low price imho.

Kiskosky - you are right. Mix up around IFRS numbers. But they still generated £60m cash this year in a year with only 80% of trading days. The remaining £60m of financial debt should be cleared away before next January (2023). I struggle to reconcile £60m cash generated this year with (old style) £31m ebitda - even deducting the govt grant of £8m.

A share price of 55p implies a market cap of £188m. Net debt of £60m takes EV to £248m. Low end ebitda estimate of £71m suggests EV / Ebitda of 3.5x and the business will grow as next year should be a full year rather than only 80% as this year. Cash generated was £60m if you include the deferred rent and VAT repaid. I don’t understand the share price fall…

TeddyW - I disagree. Lombard may have not been off their trolley expecting a lockdown before Xmas, but one didn’t come and it is looking increasingly unlikely (January is the smallest revenue month in any case). What baffles me is their choice to increase the short. If the results are just ok the share price should rerate towards 100p - causing Lombard a huge loss, and closing the short would still drive the price higher. I wouldn’t compare CF to GameStop but Lombard will be aware of what happened to shorters there. As for the hefty debt as you put it, it was under 130m at the interims (adding back rent and vat deferrals). They should have collected 40-50m net cash since then bringing debt to C 1x pre pandemic ebitda (not hefty). The CFO also said at the end of the interim statement that the board wished to maintain an efficient capital structure. I believe the chances of a 70m right issue to be minimal.

Jamesy - the gross margins at CF are not slim. I remember them stating that gross margins on single cards were 84% in a recent presentation. Granted that some people calculate what they call gross margins in different ways and that non card products have lower margins (as they are bought In whilst single cards are vertically integrated). Also when stating that the card market will contract it is important to look at that in more detail. Excluding Christmas Cards (which are declining but only account for about 2% of CF gross margins), volumes over the last decade show stability to growth of around 1%. If measured on a value basis the card market does look like it is declining but that is simply as a result of the value player (CF) taking a larger market share (as this drives the average price of cards in the market down).The same has happened to the eye glasses market as Specsavers increased market share.

Simes continues to believe that CF has not increased prices, he can continue to believe that if he wishes, and I will be thinking of him as his short is stream-rollered in the coming months.

Simes - for much of CFs 24 year existence RPI has been relatively low with wage inflation partially offset by rent reductions and higher volumes (through both LFL increases and store openings) absorbing fixed costs across more sales. CF was the cheapest and maintaining price points of 59p, 89p and 99p enabled it to continue to take share and reinforce its low price leadership. It sold cards at about a third of the price of most rivals. Last week I was in Paperchase and saw a card that CF would call a code 75 with flitter (that CF sell for 89p) selling for 5 pounds. That is a price chasm. Unlike Poundland, CF has flexibility on prices. With RPI now at record levels and consumers having more nominal money in their pockets CF can put through price increases to more than offset NMW hikes. Management know this is the way forward as store openings are slowing. And Simes, they have successfully increased prices in the past, with most of the (net of VAT) increase dropping straight to the bottom line. If you are shorting, I think it is now time to get out of the way before you get badly burnt.

Hi Rox - thanks for the message but I think it is worth adding a few things to make the post more accurate. Firstly the free cash flow figure is similar to ebitda so you need to deduct interest, capex and tax. It is fair to say that in the five years since ipo they paid dividends of 344m gbp or about 69m gbp per annum - but at the time the usd/gbp rate averaged 1.60 rather than 1.33. And some of this was generated by releveraging. Next is seasonality, this is a highly seasonal business, and even though it is profitable at the ebitda level every month of the year, not all months are equal. So of the annual £69m of annual net cash generated pre covid over 60% was generated in Nov&Dec. My take is that debt was c 125m at the half year (adjusting to add rent and vat arrears) and that by Jan 22 that will be down to c75-85m or 1.5x ebitda. If Omicron marks the end of the pandemic I suspect they will soon refinance last years debt package on friendlier terms and so the July 2022 date will no longer be relevant.

I sense someone’s bonus slipping at Lombard Odier with this short position. Question is - take a manageable hit now and salvage some bonus or hold the position to the mid January trading update and risk a “doughnut”?

I would expect to see the shops being less busy now, simply because the busiest weeks are weeks 2 and 3 of December. This is because many cards are posted rather than hand delivered. There are always a few who buy last minute though - me included.

Also worth pointing out the short term relative growth rates. I see CF Ebitda (non lease adjusted) growing from 60m to 80m in the year to Jan 2023 - that is 33% growth. This is partly driven by an expectation (subject to Omicron) that the year to Jan 23 will have 12 months of open shops vs c9 months in the year to Jan 22. For Moonpig I see the reverse where there will be a further fall in the number of transactions (as shops are fully open), however this will be partly offset by an increase in basket size as they have just achieved. So I see the ebitda for equivalent period for Moonpig being between -10% and +10% on the period before (65 to 85m GBP). In my opinion the correct share price for both businesses is 200p but it may take a couple of years for this to come about.

Banbury Boy - there are a few other things worth mentioning when comparing CF with Moonpig. They have the same number of shares in issue (342m), and roughly the same amount of debt (113m). So, unusually, you can compare the share prices of 375p for Moon with 55p for Card. One key difference though is that Moonpig appears less seasonal so the 2nd half sales will be similar to the first half, whilst for Card, Xmas is when the stores are busiest and make the most profit - this makes the relative valuations ludicrous. On an EV/ebitda basis Moon is valued at c19x whilst Card is 5x (assuming 60m ebitda for the year to Jan 2022). That is why CF is such a bargain.

Steve - not if Moonpig has come down to a market cap of 170m where CF is currently valued!

Interesting article in the Sunday Times with a strap line “Moonpig may have got a little too porky”. It may prompt some investors to switch out of the Overvalued Moonpig into the Undervalued Card Factory. Also may be an attractive long-short hedge fund play.

They gave a Xmas trading update on 14th January 2021 and so I would expect one around the middle of January 2022.

There were many reasons Clinton’s went bust that are not relevant to CF.
Cc was run by the founder’s son (Clinton Lewin) who lacked his fathers retail skills. Don Lewin had retired a few years before it went under.
CC was a pure retailer and so only made a mark up on what it bought from American Greetings and Hallmark. CF designs and prints it’s own cards and so earns a greater part of the value chain in its margin.
Clinton was locked into expensive 20 year upward only leases.
Clinton (despite charging very high prices - 3x what CF charges) was not a premium retailer, it was part of the squeezed middle. CF is a clear value retailer.
As a result CC shops were empty while CF shops are full of customers.

Positive RNS this morning showing that Wellcome Trust has bought more shares (on15/11) and have crossed the disclosable 3% level. Good to see top tier shareholders returning.

I don’t understand why everyone is getting worked up about low hours contracts. They are fairly standard in retail. The majority of store workers are women, some/many have children and so want to work but can’t commit to a 35hr week because of school pickups etc. The store manager has a need for extra staff around busier times - such as when office workers are on a lunch break and go shopping for cards. The low hour contracts allow many workers to do the number of hours they are able to and the store manager to cope with intra day customer peaks. Nobody seems to get excited about the extra seasonal staff (often students) who help out at the busier Xmas times. It is the same thing - intra day vs intra year.