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Card Factory sales growth accelerates but exchange rates and wages hit margins

Card Factory warned that its margins will be hit by foreign exchange headwinds and higher minimum wages

Card Factory
Card Factory has been building stock for the Christmas trading period

Card Factory PLC (LON:CARD) shares gained as the greeting cards retailer saw sales growth accelerate in the nine months to the end of October.

Sales rose 6.7% in the period, compared to a 4.4% increase the same time a year ago, driven by growth in lower margin non-card categories.

Pressures ahead

However, the group warned that its margins in the remainder of the year and in fiscal year 2018 will be hit by ongoing external pressures, including foreign exchange headwinds and the national living wage.

“Nevertheless, we go into the important final quarter with an exciting and extended Christmas offer and remain confident that our quality and value credentials will continue to resonate well with our customers, with the added benefit of EPOS and contactless in every store,” said chief executive Karen Hubbard.

The company opened eight net new UK stores during the third quarter, bringing the number of additions to 38 net stores in the year to date and total to 903 at 31 October.

Card Factory remains on track to open 50 net new UK stores in the current financial year and has “started to build a solid pipeline of new store opportunities for the next financial year”.  It is “confident” of continuing its historical opening rate of about 50 net new stores per year.

Cash generation

The group added that it remains “highly cash generative, driven by its strong operating margins, limited working capital absorption and relatively low capital expenditure requirements”.

At the end of October net debt totalled £156mln, compared to £128.6mln last year, reflecting the planned build-up of stock for the upcoming Christmas trading period.

Analysts at UBS said the sales growth in the first half implied a modest acceleration to 7.5% in the third quarter. “With store openings on track (38 net new stores opened thus far out of a target of c50) this suggests that the LFL performance remains robust as well,” it said.

For fiscal year 2018, the bank expects 6.6% group sales growth, broadly in line with the nine-month run rate, and a like-for-like sales gain of 2.5%. 

“Operational expenditure leverage will be limited given upward pressure on wage costs, so lower gross margins drop through to a 200 basis point decline in EBIT margins.”
 

Quick facts: Card Factory

Price: 156 GBX

LSE:CARD
Market: LSE
Market Cap: £532.82 m
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