Today’s interim results from Card Factory (LSE: CARD) show that the UK’s leading specialist retailer of greeting cards is making encouraging progress. But is fellow retailer Tesco (LSE: TSCO), which sells some of the same products as Card Factory plus a whole lot more, a better buy?
Card Factory’s top line increased by 4.8% versus the first half of the previous year. This was helped by like-for-like (LFL) sales growth of 0.2% which boosted EBITDA (earnings before interest, tax, depreciation and amortisation) by 5.1% to £34.2m. LFL sales were positive due to an improvement in Card Factory’s quality and range of products, which delivered good growth in average spend.
Furthermore, there was good growth from the new Card Factory website. This helped to offset the softer footfall which weighed on growth numbers. Still, Card Factory’s pre-tax profit was 7.3% higher than in the first half of the previous year at £27.6m.
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Looking ahead, Card Factory has a strong pipeline of new store opportunities. It’s on track to deliver around 50 net new openings by the end of the current year. It’s also starting to build its pipeline for financial year 2018. Its efficiency is improving, with Card Factory’s industry-leading EBITDA margins of 20.2% being evidence of this. It has good opportunities to deliver further cost savings in future and they could prove useful should margin headwinds materialise in the next financial year.
In terms of growth prospects, Card Factory is expected to record flat earnings for the current year, followed by growth of 4% next year. Clearly, the outlook for UK-focused retailers is very challenging due to Brexit and a potential slowdown in consumer spending. However, Card Factory has maintained a premium valuation despite its rather lacklustre outlook. It trades on a price-to-earnings (P/E) ratio of 16. This equates to a relatively unappealing price-to-earnings growth (PEG) ratio of 4.
Tesco turnaround
Tesco faces the same difficult outlook for the UK economy. Competition in the UK supermarket sector remains exceptionally high. However, thanks to its turnaround strategy Tesco is forecast to return to strong growth in the current year and then to follow that up with more growth next year. In fact, its bottom line is due to rise by 141% this year and by 38% next year. This puts it on a PEG ratio of only 0.5, which indicates that it offers growth at a very reasonable price.
Furthermore, Tesco has greater size and scale than Card Factory. This means that its risk profile is lower and it makes Tesco’s risk/reward ratio more appealing than that of Card Factory. Although Card Factory yields 2.9% versus 0.2% for Tesco, the latter’s dividend is due to be covered 16.6 times this year versus 2.1 for Card Factory. This shows that Tesco’s dividend could rapidly grow, thereby making it a hugely appealing income, growth and value play. As such, it’s a better buy than Card Factory, I believe.
