Card Factory Regulatory News (CARD)

18 September 2014

Card Factory plc ("Card Factory" or the "Group")

Interim results for the six months ended 31 July 2014

Card Factory, the UK's leading specialist retailer of greeting cards and related gifting items, announces its interim results for the six months ended 31 July 2014.

Financial Highlights

· Revenues up 8.9% to £149.4m (H1 FY14: £137.2m)

· Like-for-like (LFL) sales up +2.6% (H1 FY14: +3.3%) (see Note 2)

· Underlying operating profit growth of 9.3% to £26.1m (H1 FY14: £23.9m)

· Underlying EBITDA growth of 10.1% to £30.2m (H1 FY14: £27.5m)

· Underlying LTM EBITDA increased to £83.1m, being EBITDA for the twelve months ended 31 July 2014

· Leverage reduced to less than 1.8x underlying LTM EBITDA

Note

Underlying profit figures exclude costs relating to the IPO, the senior debt refinancing and mark-to-market movements on derivatives not designated as a hedging relationship.

Statutory results

· Statutory loss before tax of £7.9m (H1 FY14: profit of £3.7m) reflects £22.8m of non-underlying expenses principally relating to charges associated with the IPO and senior debt refinancing (H1 FY14: non-underlying income of £1.9m)

· Total reported net debt reduced significantly to £144.2m (H1 FY14: £368.7m), being net debt of £146.7m (H1 FY14 £372.9m) less debt costs capitalised of £2.5m (H1 FY14: £4.2m), again reflecting the IPO and senior debt refinancing transactions

Business Highlights

· Further progress on all four pillars of the Group's growth strategy:

1. Like-for-like sales growth in existing stores

· Successful introduction of new merchandising initiatives

· Improvements in quality and range of both card and non-card products

2. Continuing new store roll out

· 36 net new stores opened in the period, bringing total estate to 749

· Strong pipeline of further new opportunities - on track to deliver approximately 50 net new openings by the year end  

3. Delivering business efficiencies

· Maintenance of strong underlying EBITDA margins at 20.2% (H1 FY14: 20.0%) in parallel with further investment in the business

· Continued rollout of EPOS system to over 30% of store estate

4. Development of complementary online sales channels

· Growing rapidly as a relatively new entrant

· Revenue at Getting Personal increased by over 16% to £5.5m and EBITDA more than doubled to £0.8m

· Continued fund raising for Macmillan Cancer Support - over £3m contributed in last 8 years

· Completion of IPO in May 2014

· Completion of £200m debt refinancing, significantly reducing interest costs

· Continued investment in the Board, management team and employees

Richard Hayes, Chief Executive Officer, commented:

"Having completed our flotation on the London Stock Exchange earlier this year, it is pleasing to report a strong set of maiden interim results. We continue to deliver on each of our four pillars of growth - growing like-for-like sales; rolling out new stores; delivering business efficiencies; and increasing our online business.

"The continued growth and further improvement in our retail proposition is particularly satisfying given that this was achieved during a period in which we completed the IPO process. This reflects the strength of the whole Card Factory team and their support and commitment is greatly appreciated and valued by the Board.

"We remain confident of the Group's future prospects."

Interim results presentation

A presentation for analysts will be held today starting at 9.30am at UBS Limited, 1 Finsbury Avenue, London EC2M 2PP. If you would like to register for attendance then please contact Naomi Lane at MHP Communications on 0203 128 8204 or Naomi.lane@mhpc.com.

Enquiries

Card Factory plc ("Card Factory" or the "Group")

Interim results for the six months ended 31 July 2014

Chairman's Statement

Card Factory has continued with its successful growth strategy and further enhanced its status as the UK's market-leading specialist retailer of greeting cards. The Group continues to deliver consistently best-in-class margins and excellent free cashflow before financing, benefiting significantly from its unique vertically integrated business model.

As set out at the time of flotation, the Group's clear strategy is focused on four pillars of growth:

- continuing to grow like-for-like sales in existing stores; 

- continuing to roll out profitable new stores; 

- continuing to focus on delivering business efficiencies; and 

- increasing penetration of the complementary online market.

The Group's management team has an established track record of delivery in each of these pillars, growing profits strongly and consistently generating significant surplus cashflow before financing. Having worked closely with the management team throughout this year, I am confident that this track record of success will continue now that Card Factory has entered a new chapter as a public company.

Geoff Cooper

Chairman

18 September 2014

Chief Executive Officer's review

Overview

Card Factory has had a successful first half, generating strong growth in both revenues and profits in line with management's expectations, as well as completing the initial public offering of the Company four months ago.

As set out in the IPO prospectus, the Group intends to continue with its successful strategy and further enhance its status as the UK's market-leading specialist retailer of greeting cards and related gifting items.

Our strategy is to maintain the Group's clearly differentiated value proposition, focusing on four pillars of growth. Good progress has been made in each of our key strategic pillars:

1. Continue to grow like-for-like sales in existing stores

The Group has a strong track record of consistently delivering like-for-like sales growth whilst maintaining its core value proposition.

In the first half of the current financial year, Card Factory's like-for-like store sales grew by +2.6% despite a strong comparable period last year when like-for-like sales grew by +3.3% (see Note 2 below).

A number of factors have contributed to this strong like-for-like performance, including various new merchandising initiatives and continuous improvements to the overall product quality and range for both card and non-card products, as well as further market share gains as stores mature.

Our in-house Design Studio, established almost a decade ago, is an important contributor to the ongoing success of the Group and to like-for-like sales growth. During the period under review we continued to recruit and develop high quality, creative talent and invest in state-of-the-art equipment to support this core function. Our design team is best-in-class and this is reflected in our sales performance and continuing market share gains.

In the first half the Design Studio focused in particular on our continued refresh of the Everyday product range, including the introduction of various new card ranges, further improvements to the gift dressings category and improved helium balloon, photo frame and counter offerings.

2. Continue to roll out profitable new stores

In addition to continued growth in like-for-like sales from existing stores, the Group's established new store roll out programme is also an important driver of sales growth for the business.

In the first half of this year, 37 new stores were opened and one closed, bringing the total estate to 749 stores as at 31 July 2014. Five stores were relocated during the period.

We are pleased with the quality of our new store openings and their performance to date.

The Group continues to have a strong pipeline of additional new store opportunities and remains confident of opening a total of approximately 50 net new stores in the current financial year, in line with the average historic opening rate over the last decade.

Card Factory continues to be very disciplined in considering the terms of new leases and renewals and we regularly reject new opportunities if forecast returns are not considered satisfactory.

Card Factory has a versatile, high returns model, which operates profitably in a wide range of locations and demographics. This is highlighted by examples of the stores opened in the first half of this year:

- Major city centres: Cardiff, Glasgow

- Regional shopping centres: Silverburn

- Retail parks: Orpington Nugent, Llanelli Parc Trostre

- Factory outlets: Freeport Castleford

- London suburbs: Wembley, Loughton

- Suburbs of major urban areas: Bretton (Peterborough), Acomb (York)

- Affluent towns: Harrogate, Haywards Heath

The Board remains confident of the potential to expand the store portfolio to up to 1,200 stores in total.

3. Continue to focus on delivering business efficiencies

The Group is focused on achieving efficiencies, particularly through its vertically integrated business model, and has consistently delivered some of the best operating profit margins in the wider retail sector over a number of years. These high margins have been maintained in the first half of the current financial year.

The Board continues to focus on maintaining and, where possible, improving these margins through an ongoing focus on cost control, leveraging investments in both people and infrastructure, further improving the supply chain and continuing to leverage further economies of scale.

Strong cost control remains central to the Group's philosophy and culture with initiatives in place to manage overall employee costs, negotiate improved rental terms upon the break or expiry and subsequent renewal of existing leases in the store portfolio and maintain tight control over other costs and expenses.

Card Factory has continued to roll out its new electronic point of sale ("EPOS") system to stores and the new system was deployed in over 30% of the estate as at 31 July 2014. Each new store is now fitted with the new EPOS system from the date of opening and the Board anticipates that the balance of the existing estate will be converted to the new EPOS system by 31 January 2017.

Having invested in other Head Office systems in the past five years (such as the Supply Chain's Microsoft AX ERP system, web development for the Online division and the Design Studio's design equipment), this step change in the quality of the in-store systems will add further value to the business in the future. The Group is already utilising this new EPOS system for data mining and for both strategic and operational planning and expects a range of benefits to be delivered over a number of years. The capital expenditure for this EPOS conversion project continues to be in line with management's expectations.

A more detailed cost breakdown is given in the financial information section below.

4. Increase penetration of the complementary online market

The Group is a relatively new entrant into the complementary online market segments for personalised online card and non-card products. The Group first established its online platform with the acquisition of Getting Personal (www.gettingpersonal.co.uk) in 2011 and supplemented this with the launch of the Card Factory transactional website (www.cardfactory.eu.com) in 2012.

Getting Personal currently represents most of the Group's online revenues with the focus on personalised gifts and non-card products.

The Group has made good progress in the first half with Getting Personal growing revenue by over 16% to £5.5m and EBITDA more than doubling to £0.8m.

This strong performance at Getting Personal builds on its doubling of EBITDA in the last financial year and has been driven by a combination of new product development, improved marketing and the recent relaunch of the Getting Personal website to more effectively cater for the growing use of smart phones and tablet devices.

Whilst there can be no guarantee that online revenue and profit will continue to grow at the same rate as experienced in the first half, the Group has a number of initiatives underway and in planning and is optimistic of the future growth prospects for its recently established online division in the coming years.

Macmillan Cancer Support

The Group enjoys a close and long-standing association with Macmillan Cancer Support stretching back to 2006. Through the support of both our staff and customers we continue to make significant contributions to this important organisation.

Our annual store raffle held on one day in July raised over £90,000, which, together with other fund raising initiatives, has taken the total monies raised over the last eight years to over £3m.

We are very proud of this fantastic achievement and a huge thank you goes to our staff and customers in helping us achieve this impressive milestone.

Board, management team and employees

During the first half we have expanded and strengthened our Board with the appointment of Geoff Cooper as Chairman, Octavia Morley as Senior Independent Non-Executive Director and David Stead as Independent Non-Executive Director.

We have also recently appointed John Nother as Group Chief Information Officer and Shiv Sibal as Group General Counsel and Company Secretary. Both of these are newly established roles as we continue to invest in the wider management team. John joins from ASDA and brings extensive IT and multi-channel experience to the Group; he is already working closely with the existing management team to leverage our recent and planned investment in EPOS and seek to expand our online division. Shiv is an experienced corporate lawyer and joins from Bond Dickinson, where he was a partner; he previously worked for Pinsent Masons and Nabarro.

Andy Garbutt, a member of the operational management team with a focus on property, has recently resigned to pursue a wider opportunity with another retail company. He has agreed to remain with the Group for a minimum of 6 months to ensure an orderly transition.

A recruitment process is underway and an appointment will be made in due course.

As we report our maiden set of interim results as a public company, it is a fitting time for me to thank all of those who worked so tirelessly on the IPO process which completed earlier this year. I would also like to add my thanks to all our employees for their support and commitment throughout this period which saw the Group continue to expand and grow.

Financial performance

Total revenues during the period grew by 8.9% to £149.4m (H1 FY14: £137.2m).

Both of the Group's businesses have traded well in the first six months of this year, growing revenue and underlying EBITDA:

As expected, whilst there is some seasonality in our business, the Group delivered positive operating profit in each month of the first half.

The underlying EBITDA margin of the Group has been maintained at 20.2% (H1 FY14: 20.0%). In the first half of this year our underlying operating margin has also been maintained at 17.5% (H1 FY14: 17.4%).

As highlighted by the underlying EBITDA and operating margins for the year ended 31 January 2014 of 24.6% and 22.3% respectively, margins in the second half of the financial year are typically higher than the first half given the impact of the Christmas trading period.

Cost of sales and operating expenses continue to be well controlled and are broken down as follows:

*excluding depreciation and amortisation

The overall ratio of cost of sales to revenue remained consistent with the prior year at 71.9% on an underlying basis (H1 FY14: 71.8%) with the following movements in sub-categories:

- Cost of goods sold: principally comprises cost of raw materials, production costs, finished goods purchased from third party suppliers, import duty, freight/carriage costs and warehouse wages. The reported increased ratio of cost of goods sold to revenue shown above has been distorted by the IFRS accounting treatment of certain legacy foreign exchange hedges which, whilst effective commercially, are not deemed technically eligible for hedge accounting under IFRS. This treatment resulted in an adverse accounting adjustment in the first half as opposed to a beneficial accounting adjustment in the prior year comparative period. Had all of these hedges been eligible for hedge accounting under IFRS, the ratio of this cost to revenue would have been broadly consistent at c 30.7% in both years. The final tranches of these hedges mature in the second half of this year; all other existing hedges are vanilla forwards, accounted for under the hedge accounting rules of IAS39.  

- Store wages: includes wages and salaries (including bonuses) for store based staff, together with National Insurance, pension contributions, overtime, holiday and sick pay. This cost has increased as new stores have been opened but has remained consistent as a ratio of revenue. 

- Store property costs: consists principally of store rents (net of rental incentives), business rates and service charges. This cost has also increased as new stores have been opened but has reduced slightly as a ratio of revenue. Many of the Group's existing stores remain on leases taken out before the recession when the property market was stronger and the company's covenant was weaker. The improvement in this cost ratio reflects changes to these factors for both new stores and breaks and expiries on existing leases.

- Other direct expenses: includes store opening costs, store utility costs, waste disposal, store maintenance, point of sale costs and pay per click expenditure. This cost category is largely variable in respect of existing stores and increases with new store openings. The ratio of other direct expenses to revenue has improved marginally to 5.0% from 5.3% as a result of various business efficiency initiatives.

Operating expenses (excluding depreciation and amortisation) include items such as head office salaries and remuneration, costs relating to regional and area managers, design studio costs and insurance together with other central overheads and administration costs. The Group has invested heavily in central infrastructure and people in recent years. Total operating expenses (excluding depreciation and amortisation) in the first half increased slightly to £11.8m (H1 FY14: £11.2m) but reduced as a ratio of revenue as the Group leveraged further economies of scale and business efficiencies.

Depreciation and amortisation increased from £3.6m to £4.1m reflecting significant one-off investments made in recent years, in particular, the expansion of the central distribution centre, the relocation and expansion of our printing division, Printcraft, and the initial phases of the EPOS rollout.

Capital expenditure totalled £5.6m in the first half of which £1.5m related to the EPOS rollout. In the equivalent period last year, capital expenditure totalled £7.6m of which £3.6m related to one-off strategic projects, principally EPOS and the building of a fourth warehouse and a new Head Office.

IPO and senior debt refinancing

The IPO of the Company was completed with formal admission to the Official List and to trading on the London Stock Exchange on 20 May 2014 and a senior debt refinancing was completed on 30 May 2014. The first half results therefore reflect very different capital structures pre and post these significant transactions and, as such, a year-on-year comparison of financing costs, profit before tax and profit after tax is not meaningful.

Following the IPO and refinancing, proforma opening senior debt of approximately £160m consisted of £180m senior debt and approximately £20m cash (after all anticipated transaction costs). The new debt facility of £200m also included a £20m revolving credit facility. The fees and expenses of this debt refinancing which totalled £2.6m have been capitalised and will be amortised to the Income Statement over the five year term of the new senior debt facility in accordance with accounting standards. Debt costs capitalised in relation to the previous senior debt facility of £7.7m were written off as a non-cash, non-underlying item at the same time. The new senior term loan and revolving credit facility are subject to a margin ratchet dependent upon leverage levels with interest currently charged at 2.00% above LIBOR and 1.75% above LIBOR respectively. A £100m LIBOR swap at 0.795% provides significant interest rate protection until 31 October 2015.

Net financing costs in the period include approximately four months with the previous capital structure with higher levels of leverage, a significant proportion of accrued loan note interest and a higher weighted average interest cost.

Had the IPO and senior debt refinancing completed on 31 January 2014, the net financing costs expensed in the Income Statement in the six months ended 31 July 2014 would have totalled approximately £3m (including a non-cash movement of c £0.3m of debt costs amortised), rather than the underlying net financing expense of £11.2m reported.

Statutory results

As mentioned above, as a consequence of the IPO and refinancing completed during the period, statutory results differ materially from the underlying results and can be reconciled as follows:

Further detail on the non-underlying reconciling items is set out in Note 6 to the attached interim results.

Strong financial position

The Group remains highly cash generative before financing activities.

As at 31 July 2014, net debt (excluding debt issue costs of £2.5m) had reduced to approximately £146.7 million, analysed as follows:

Net debt represents less than 1.8x underlying EBITDA for the 12 months ended 31 July 2014.

The Group typically delivers particularly strong cash generation in the second half of its financial year which contains the Christmas trading period. The Board therefore expects to report a further reduction in this net debt position at the year end.

Dividend policy

The first dividend will be announced with the full year results and this will be a dividend for the full financial year (not pro-rated). Given the change in capital structure referred to above, the Board anticipates calculating this dividend on a proforma basis, as if the IPO and senior debt refinancing had completed on 31 January 2014.

As stated in the IPO prospectus, the Board intends to adopt a progressive dividend policy, targeting a cover of 2.0-3.0x adjusted earnings. The Board expects the dividend cover for the current financial year to be around 2.5x.

The Board also intends to continue to review the appropriate capital structure of the Group and, as stated at the time of the IPO, the Board intends to maintain a capital structure that is conservative yet efficient in terms of providing long term returns to shareholders.

Outlook

In the period since 31 July 2014 the Group has continued to trade in line with expectations at time of the IPO. We remain confident of the Group's future prospects.

Richard Hayes

Chief Executive Officer

18 September 2014

Notes

1. Background information

Card Factory is the UK's leading specialist retailer of greeting cards. It focuses on the value and mid-market segments of the UK's large, resilient and growing greeting cards market, and also offers a wide range of other quality products, including small gifts and gift dressings, at affordable prices. Card Factory principally operates through its nationwide chain of approximately 750 Card Factory stores, as well as through its online offerings: www.gettingpersonal.co.uk (which sells personalised cards and gifts) and www.cardfactory.eu.com (which sells a selection of the products available in Card Factory stores).

Card Factory commenced operations in 1997 with just one store and has expanded its store estate primarily through organic growth into a market-leading value retailer with a nationwide presence. The Group's stores are in a wide range of locations including on high streets in small towns through to major cities, shopping centre developments, out-of-town retail parks and factory outlet centres.

Over the last 10 years, Card Factory has developed a vertically integrated business model with an in-house design team, an in-house printing facility and central warehousing capacity of over 360,000 sq. ft. This model differentiates the Group from its competitors by significantly reducing external costs and adding value to customers in terms of both price and quality, underpinning the Group's motto: "compare the quality, compare the price".

Card Factory sold over 285 million single cards in the financial year ended 31 January 2014. In that year, the Group achieved revenue growth of 9.0% to £326.9 million and underlying EBITDA growth of 9.2% to £80.4 million (2013: £73.6 million) at a margin of 24.6%.

2. Like-for-like definition

The Group defines like-for-like sales as the year-on-year growth in sales for Card Factory stores which have been opened for a full year, calculated on a calendar week basis. As such, this reported like-for-like sales figure excludes sales:

• relating to Card Factory stores that have not yet been open for a full 52 weeks;

• from the recently established Card Factory transactional website, www.cardfactory.eu.com;

• made via the separately branded personalised card and gift website, Getting Personal;

• by Printcraft, the Group's printing division, to external third-party customers; and

• from stores closed for all or part of the relevant period (or the prior year comparable period).

As highlighted in the IPO prospectus, like-for-like sales in the year ended 31 January 2014 benefitted to a small degree from the administration of a competitor in May 2012.

3. Calculation of percentage movements

Percentage changes have been calculated before figures were rounded to £0.1m.

4. Cautionary Statement

This announcement is based on information from unaudited management accounts and contains certain forward-looking statements with respect to the financial condition, results of operations, and businesses of Card Factory plc. These statements and forecasts involve risk, uncertainty and assumptions because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements are made only as at the date of this announcement. Nothing in this announcement should be construed as a profit forecast. Except as required by law, Card Factory plc has no obligation to update the forward-looking statements or to correct any inaccuracies therein.

Condensed consolidated income statement (unaudited)

For the six months ended 31 July 2014

All activities relate to continuing operations.

Condensed consolidated statement of comprehensive income (unaudited)

For the six months ended 31 July 2014

Condensed consolidated statement of financial position (unaudited)

As at 31 July 2014

Condensed consolidated statement of changes in equity (unaudited)

For the six months ended 31 January 2014

Condensed consolidated cash flow statement (unaudited)

For the six months ended 31 July 2014

Notes to the interim financial statements (unaudited)

1 General information

Card Factory plc (the 'Company') is a public limited company incorporated in the United Kingdom. The Company is domiciled in the United Kingdom and its registered office is Century House, Brunel Road, 41 Industrial Estate, Wakefield WF2 0XG.

2 Basis of preparation

These unaudited condensed consolidated interim financial statements ('interim financial statements') for the six months ended 31 July 2014 comprise the Company and its subsidiaries (together referred to as the 'Group'). The interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and the requirements of IAS 34 Interim Financial Reporting as adopted by the European Union. The interim report was approved by the Board of Directors on 18 September 2014.

Impact of the Group restructure prior to the Initial Public Offering

On 20 May 2014, Card Factory plc was admitted to trading on the London Stock Exchange. In preparation for the Initial Public Offering, the Group was restructured. On 30 April 2014 Card Factory plc (formerly CF Listco Limited, incorporated on 17 April 2014 for the purpose of the restructure) acquired 100% of the share capital of CF Topco Limited in a share for share exchange, thereby inserting Card Factory plc as the parent company of the Group. The shareholders of CF Topco Limited became 100% owners of the enlarged share capital of Card Factory plc. The transaction has been accounted for using the principles of reverse acquisition accounting. By applying the principles of reverse acquisition accounting, the interim financial statements are presented as if Card Factory plc had always owned CF Topco Limited. Comparative figures are the consolidated results of CF Topco Limited for the six months ended 31 July 2013 and the year ended 31 January 2014, adjusted to reflect the statutory share capital, share premium and merger reserve of Card Factory plc at the point of the restructure, thereby creating a reverse acquisition reserve presented within 'other reserves' in the statement of financial position and the statement of changes in equity.

The comparative financial information for the year ended 31 January 2014 has been extracted from the historical financial information published in the initial public offering prospectus ('IPO prospectus'), dated 15 May 2014, on which an unqualified Accountant's report opinion was issued. The historical financial information published in the IPO prospectus is prepared in accordance with International Financial Reporting Standards as adopted by the EU ('EU IFRS').

Significant judgements and estimates

The preparation of the interim financial statements requires the use of judgements, estimates and assumptions that affect the application of the Group's accounting policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. The significant judgements and key sources of estimation uncertainty were consistent with those applied in the historical financial information published in the IPO prospectus, except in relation to the treatment of transactions relating to the IPO and therefore not relevant to prior periods.

Going concern

The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the financial statements have been prepared on a going concern basis. 

3 Significant accounting policies

The financial statements have been prepared under the historical cost convention except for derivative financial instruments which are stated at their fair value.

The significant accounting policies are consistent with those applied in the historical financial information published in the IPO prospectus, except for share based payments which were not relevant to prior periods.

Share based payments

The Group issues equity-settled share based payments to certain employees. The cost of equity-settled share awards is measured as the fair value of the award at the grant date using the Black-Scholes model.

The cost of the awards is expensed to the income statement, together with a corresponding adjustment to equity, on a straight line basis over the vesting period of the award. The total income statement charge is based on the Group's estimate of the number of share awards that will eventually vest in accordance with the vesting conditions. The awards do not include market-based vesting conditions. At each balance sheet date, the Group revises its estimate of the number of awards that are expected to vest. Any revision to estimates is recognised in the income statement, with a corresponding adjustment to equity.

EU Endorsed International Financial Reporting Standards effective in the current period

New standards and amendments to standards effective for the current period do not have an impact on the interim financial statements.

EU Endorsed International Financial Reporting Standards in issue but not yet effective

New and amended standards that are endorsed by the EU, or awaiting endorsement, with effective dates impacting future reporting periods are not expected to have a material impact on the Group.

4 Segmental reporting

The Group has two operating segments trading under the names Card Factory and Getting Personal. Card Factory retails cards and gifts in the UK though an extensive store network. Getting Personal is an online retailer of personalised cards and gifts. Getting Personal does not meet the quantitative thresholds of a reportable segment as defined in IFRS 8. Consequently the results of the Group are presented as a single reportable segment. Revenues outside of the UK are not significant at less than £0.1 million.

5 Underlying EBITDA

Underlying earnings before interest, tax, depreciation and amortisation ("EBITDA") represents underlying profit for the period before net finance expense, taxation, depreciation and amortisation.

6 Non-underlying items

Net fair value remeasurement gains and losses on derivative financial instruments

The Group utilises foreign currency derivative contracts to manage the foreign exchange risk on U.S. Dollar denominated purchases. Fair value gains and losses on such instruments are recognised in the income statement to the extent they are not hedge accounted under IAS 39. Such gains and losses are unrealised and relate to future cash flows. In accordance with the commercial reasoning for entering into these agreements, the gains/losses are deemed not representative of the underlying financial performance in the year and presented as non-underlying items.

IPO costs

In May 2014, Card Factory plc floated on the London Stock Exchange. Non-recurring IPO related costs totalled £5.2m of which £3.6m was charged to the income statement and £1.6m was recognised within share premium as costs directly related to the issue of new shares.

Residual management equity share based payment

On admission to the London Stock Exchange, shares with a fair value of £9.8m were issued in relation to residual management equity as detailed in the IPO prospectus. Employer national insurance of £1.4m was incurred on the issue of the shares. These non-recurring share based payments are presented as a non-underlying item in the income statement.

Refinanced debt issue cost amortisation

Debt issue costs not yet amortised totalling £7.7m were expensed to the income statement when bank borrowings were repaid and re-financed on 30 May 2014. See note 14 for details of net debt movements.

7 Finance income and expense

Amortisation of loan issue costs include £7.7m relating to the refinancing of bank borrowings on 30 May 2014 and are treated as non-underlying, see note 6.

8 Taxation

The tax charge on underlying profit before tax for the interim period has been calculated on the basis of the estimated effective tax rate on underlying profit before tax for the full year to 31 January 2015 of 21.6% (July 2013 and January 2014 37.9%).

The effective tax rate was higher in the prior year principally due to non-deductible interest costs in relation to shareholder loan notes. Shareholder loan notes were part repaid in October 2013 and the remaining balance settled by share exchange in May 2014 prior to the IPO. Furthermore, under a new thin capitalisation agreement approved in the current period, shareholder loan note interest for the period October 2013 to May 2014 is now deductible in full giving rise to a £0.7m non-underlying current period tax credit on interest accrued to 31 January 2014.

The tax credit on non-underlying items is recognised at an effective tax rate of 18.0% (July 2013 and January 2014: 23.2%) reflecting non-deductible items in relation to IPO fees. In addition, the non-underlying tax credit also includes the £0.7m one-off adjustment detailed above.

9 Earnings per share

Basic earnings per share is calculated by dividing the profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period.

The weighted average number of shares for periods prior to the reverse acquisition (see note 2 for details of the reverse acquisition) reflect the weighted average number of ordinary shares of CF Topco Limited, multiplied for a 1:50 share split effected on the reverse acquisition.

Diluted earnings per share is based on the weighted average number of shares in issue for the period, adjusted for the dilutive effect of potential ordinary shares. Potential ordinary shares represent share incentive awards granted to employees in the period and have nil dilutive impact at the average share price for the period.

The Group has chosen to present an alternative earnings per share measure, with profit adjusted for non-underlying items to reflect the Group's underlying profit for the year. Underlying earnings is not a recognised profit measure under IFRS and may not be directly comparable with 'adjusted' profit measures used by other companies.

10 Intangible Assets

11 Property, plant and equipment

12 Financial instruments

Financial instruments carried at fair value are measured by reference to the following fair value hierarchy:

- Level 1: quoted prices in active markets for identical assets or liabilities

- Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

- Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Financial instruments carried at fair value within the Group are derivative financial instruments measured under a level 2 valuation method. Valuations are provided by the instrument counter-party.

13 Notes to the cash flow statement

Reconciliation of operating profit to cash generated from operations:

14 Analysis of net debt

In May 2013 the Group utilised retained cash balances to redeem £35.0 million 10% loan notes and pay £12.1 million related accrued interest.

In October 2013 the Group redeemed 14% loan notes and accrued interest, together totalling £170.0 million, funded by an additional £165.0 million secured bank loan facility and retained cash balances.

In May 2014, prior to the IPO, the Group issued shares at market value in full settlement of the remaining £114.0m loan notes and accrued interest.

In May 2014 the Group re-financed secured bank borrowings, utilising retained cash and proceeds from the IPO to reduce secured bank debt to £180.0m. The new facilities agreement includes a term loan of £180.0m and a £20.0m revolving facility for working capital purposes, both terminating in April 2019. The term loan facility attracts interest at LIBOR plus a margin in the range 1.50% to 2.50%, subject to a leverage ratchet. The RCF facility attracts interest at LIBOR plus a margin in the range 1.25% to 2.25%, subject to a leverage ratchet. The facilities are subject to financial covenants typical to an arrangement of this nature.

15 Share capital and share premium

16 Related party transactions

In May 2014, as detailed in the IPO prospectus, the company issued 50.7m ordinary shares at market value, in full settlement of 114.0m 14% loan notes due to related parties as follows:

· 40.1m shares to funds managed by Charterhouse General Partners (IX) Limited in settlement of £90.1m loan notes. Loan note interest of £3.4m accrued in the current financial period prior to settlement. Funds managed by Charterhouse General Partners (IX) Limited control 41.3% of the ordinary share capital and are represented on the Board of Directors by Graeme Coulthard, Non-Executive Director;

· 1.2m shares to Richard Hayes, Chief Executive Officer, in settlement of £2.6m loan notes. Loan note interest of £0.1m accrued in the current financial period prior to settlement;

· 0.03m shares to Darren Bryant, Chief Financial Officer, in settlement of £0.1m loan notes. Loan note interest of £0.002m accrued in the current financial period prior to settlement; and

· 9.4m shares to other key management personnel in settlement of £21.2m loan notes. Loan note interest of £0.8m accrued in the current financial period prior to settlement.

In May 2014, as detailed in the IPO prospectus, the company issued 4.4m ordinary shares at nominal value in relation to residual management equity as follows:

· 1.9m shares to Darren Bryant, Chief Financial Officer; and

· 2.5m to other key management personnel.

17 Principal risks and uncertainties

There are a number of risks and uncertainties that could have a material impact on the Group's operating and financial performance.

Detailed disclosure of the risks and uncertainties to which the Group is currently subject can be found on pages 22 to 31 of the IPO prospectus, published by the Company on the admission of its shares to the Official List of the Financial Conduct Authority and to trading on the London Stock Exchange. The Group considers the following to be its principal risks:

Commercial

Business strategy - Our business strategy has been developed with the aim of achieving long-term value for our shareholders. The Board recognises that if the strategy of and vision for the business are inappropriately developed, communicated or delivered there could be an adverse impact on our business and its prospects.

Competition - The greeting cards sector is highly competitive, including with respect to product selection and quality, store location and design, price and customer service. We compete with a wide range of retailers that offer competing products of varying quality and price. Some of our competitors, particularly supermarkets, general merchandise discounters and stationery retailers, may have greater market presence, name recognition, financial resources and purchasing economies of scale, any of which could give them a competitive advantage.

Our brands - The "Card Factory" and "Getting Personal" brands are important assets of the Group. If we are unable to protect our brand names or there is an event which materially damages the reputation of our brands and/or we fail to sustain our appeal to our customers this could have an adverse impact on our sales and future prospects.

Store portfolio expansion - Expansion of our store portfolio to approximately 1,200 stores over the next 10 years is part of our growth strategy. Growth in the Group's sales and profits over the period will depend on our ability to find suitable locations for new stores which, when trading, will have a positive impact on the profitability of the Group. Competition among retailers for store sites and our ability to acquire them on acceptable terms and operate them profitably are key to us achieving our growth objectives. Any failure to achieve these will negatively impact on the Group's sales and profits. Additionally, a growing store portfolio will increase the operational complexity of the Group. Our ability to support this growing portfolio through our operational infrastructure (including our production and distribution capabilities and our supplier base), financial systems and managerial controls and procedures will be critical to the Group's success as it continues to grow.

Financial

Treasury - Our funding arrangements and the fact that we source the majority of our non-card merchandise, as well as certain raw materials used in the production and printing of our greeting cards, from suppliers located in the Far East mean that a lack of appropriate levels of covenant headroom and/or cash resources in the Group, or significant variations in interest or exchange rates, could have an impact on our operations and performance.

Supply Chain

Sourcing/supply chain - We rely on third-parties, including many in the Far East, for the supply of nearly all of our non-card products, as well as our handcrafted greeting cards and the supply of helium and raw materials used in the production of our greeting cards. Although we have well-established relationships with many of our suppliers, any failure by them to satisfy orders on acceptable terms may adversely affect our business or result in us having to seek alternative suppliers, who may not be able to fulfil our requirements. We are also exposed to changes in supplier dynamics and vulnerable to industry-wide increases in the prices of raw materials and the products we sell.

The international nature of our supplier base means we are also subject to the risks of manufacturing and importing of goods from overseas including, but not limited to increases in the costs of goods and raw materials, interruptions in supply and reputational risk arising from the labour practices of suppliers.

Business integration - The Group has developed a vertically integrated retail business model whereby we can perform our own design, print, sourcing, warehousing, merchandising and retail functions.

Any major disruption to any of the parts of our business performing these functions, and in particular to our in-house printing facility, Printcraft, and our design studio, could severely affect our ability to supply our stores which would, in turn, affect the performance of the business. Disruption to any of these functions could also force us to use third-party providers to perform these for us and this could be expensive and may be on onerous terms.

Legal

Compliance - Many aspects of our business and operations are governed by legislation, regulations and other standards and rules in areas including, but not limited to, corporate governance, the listing and trading of our shares, employment, product quality, trading, the environment, health and safely, bribery and data protection. Any failure to comply with these could lead to penalties, fines, damages claims or reputational damage which could, in turn, have an impact on the financial performance of the business.

Human Resources

National Minimum Wage - The majority of the Group's employees are paid the UK national minimum wage. Increases in the national minimum wage or changes to labour market laws or conditions in the UK could increase the Group's operating costs (and therefore adversely affect its profitability) and reduce our operational flexibility.

Key personnel - The successful implementation of the Group's strategy and the success of our business in general depend on the continuing availability of our experienced management team and our ability to continue to attract, motivate and retain other highly qualified employees. We also rely on our in-house design team to design nearly all of the cards and non-card merchandise sold in our stores. The loss of, or inability to attract, key members of these teams could adversely affect our business.

IT

IT - The Group is dependent on reliable and efficient information and communication technology ("ICT") systems and processes. These include all systems and processes supporting our retail operations (both physical and online), our head office function and our in-house design and printing operations. A failure to adequately maintain the Group's ICT systems or any prolonged system performance problems could seriously affect our ability to implement the Group's strategy and to carry on the business.

Online - The Group's online presence in the personalised greeting card and gift market, through our Getting Personal and Card Factory transactional websites, is relatively new to our business. The integration, operation and development of these online businesses within our predominantly store based business provides an opportunity to the Group. However, there can be no assurance that these transactional websites will compete effectively in a very competitive market with low barriers to entry. If we fail to develop our transactional websites in line with changing customer tastes and evolving technology, they may not deliver the anticipated growth in sales. This may also adversely impact our reputation and our customers' perception of our brands.

Responsibility statement of the directors in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

• the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

 By order of the Board

Richard Hayes Darren Bryant

Chief Executive Officer Chief Financial Officer

18 September 2014 

Independent review report to Card Factory plc