Why have Card Factory shares increased 40% in the last month?

Card Factory shares have increased significantly over the last few months as the company reports profitability for the first time since the start of the pandemic.

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Card Factory (LSE:CARD) shares have rallied more than 9% since the start of May as the card retailer reported better-than-expected results on 3 May. The company posted revenue of £364m for FY22 (calendar 2021) and management expect revenue to recover to pre-pandemic levels this year. Card Factory also reported its first pre-tax profit since the start of the pandemic, at £11m. These are remarkable results considering its stores were closed for all Q1 2021.

Card Factory added four (net) new stores in FY22, with continued plans to expand over the coming years as management progress towards achieving their target of £600m in total revenue by FY26 (calendar 2025). 

New CEO Darcy Willson-Rymer has had an impressive first year since he took on the heavily distressed retailer in 2021. Facing significant financial and operational headwinds during the three national lockdowns, Card Factory appears to be staging an effective turnaround.  

Recently, management successfully negotiated new finance terms with their credit providers, which has removed the contingency for a £70m equity raise. This removes the risk of investors being significantly diluted, which I believe was the main reason why investors have ignored Card Factory for the past year. When the positive news broke on 21 April, Card Factory shares rallied from 45p to 60p.  

Attractive valuation   

Without the risk of dilution, I believe Card Factory stock remains cheap with a forward price-to-earnings (P/E) ratio of 9.4x and a two-year forward P/E of 5.7x. Historically, Card Factory has traded around a forward P/E of 9.8x, suggesting a cheap proposition for me. If the business can regain to pre-pandemic profit levels around £50m in the coming years, the stock could more than double from current levels.

Recession risk 

With the increased risk of recession, Card Factory is well positioned to combat a weakening economic environment. During recessions, consumers are increasing likely to visit various stores as they search for the most attractive value propositions. Card Factory is positioned as the lowest-cost UK gift card retailer, and should be able to maintain its cashflow during recessionary periods. However, average basket spending could decrease as consumers purchase lower priced cards and avoid higher ticket items like balloons or small gifts.

The UK greeting card market is slow and stable, meaning I don’t expect high levels of growth in the long term. The recent 28% increase in revenue year-over-year is impressive, but Card Factory is recovering from a low base due to temporary store closes in 2020 and 2021. Increased freight and labour costs are having an impact on margins; however, Card Factory has started targeted price increases instore.

When’s the dividend coming back?  

Card Factory has paid a dividend every year since it went public in 2014. However, the distributions were suspended during the pandemic. The board plan to reinstate a dividend at the end of 2025 when its debt profile has improved. Prior to the pandemic, shareholders received a dividend of 14p. Based on today’s share price (64p), investors could receive a dividend yield of 22% in three years’ time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

George Theodosi owns shares of 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.

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