A bit like the stuff it sells, shares in Card Factory (LSE:CARD) look cheap. But when it comes to stocks, there’s a difference between being cheap and being good value.
The share price is down 14% since the start of the year, but there are reasons to be positive about the underlying business. And a 6.7% dividend yield’s also pretty attractive.
The bull case
I think there are a lot of reasons to like Card Factory as an investment. The first is its vertical integration, which gives it a cost advantage over retailers who buy in cards from external suppliers. This allows the firm to charge lower prices than its rivals. And that’s important in an industry where people generally care more about how much they pay than where they get them from.
Another strength is an improving balance sheet. Since 2020, the company’s long-term debt has fallen from £140m to £38m, putting it in a much stronger financial position. The advantage of this isn’t just that it makes the business more resilient. Over time, less debt should mean lower interest payments and higher profits.
The third reason for optimism is Card Factory’s partnership with Aldi. I think a position in a leading supermarket looks like a much better distribution strategy than running its own shops.
Despite the falling share price, there are plenty of reasons to be positive about the business. But it’s unusual for a stock to drop for no reason and there are also causes for concern.
The bear case
I think the biggest issue with Card Factory is inflation. The company’s focus on customer value makes it tough to pass through the effects of higher costs to customers.
The government’s recent Spring Statement reported expectations of rising inflation in the near future. And there are also increased staff costs to try and factor in.
Margins have already been going the wrong way over the last 10 years, so it will be interesting to see how Card Factory copes. But this isn’t the only issue the company’s facing at the moment.
Like-for-like (LFL) sales growth has also been slowing. The firm’s January update reported LFL growth of 3.9%, which is a significant drop from the 8.2% reported in the previous year
To some extent, this is in line with a broader trend among UK retailers. The likes of Associated British Foods (Primark), Greggs and JD Sports have also reported lower LFL sales growth recently.
This goes some way towards confirming my sense that running its own stores is a tough way for Card Factory to go. And that makes me very hesitant when it comes to the stock.
An investment thesis
Another high street retailer – WH Smith – has announced plans to divest its high street stores to focus on its more profitable travel outlets. I’d like to see Card Factory do something similar.
The company’s position as a supplier to Aldi looks very interesting to me. My view is that the stock could be attractive if the firm focused on this, rather than operating from its own venues.
From what I can see though, Card Factory has absolutely no intention of doing this. And since I don’t have the power to make it happen, I’m staying away from the stock.
