Description

Card Factory is a low-cost greeting card retailer in the UK that was written up on VIC in 2018.  The stock was wrecked by the coronavirus and has begun to rebound, but we think it still trades at a 24% normalized levered free cash flow yield and therefore has > 100% upside to 10-12%.

Today, greeting cards remain an online-resistant category due to their experiential/ emotional component and a time-constrained customer base (as this audience well knows).  Someday Doordash may heroically save us all from tedious, last-minute trips to the store, but until then the greeting card market should be fairly stable.  Cards play an important cultural role that’s unlikely to change or move fully online.

As discussed in the 2018 write-up, Card Factory has for two decades been the low-cost share gainer in greeting cards, now with a 30+% share by volume and 20+% share by value.  CARD is unique because they have a vertically integrated supply chain that allows them to have cost advantage and be more nimble to adapt to changing consumer habits (new holidays, designs, culturally relevant).  Incumbents like Hallmark and American Greeting charge $4-$5, while Card Factory’s prices are less than half of that. I think Card Factory’s value proposition is clear (in both value and quality) and that’s why they continue to take market share every year. 

Management’s base case below is for a modest bounce in demand in 2021, followed by a resumption of prior industry trends (a slow decline of physical cards).  There’s an argument that demand should eventually stabilize and grow with GDP, but we don’t need that in the near term.  The logic would be 87% of adults in the UK purchase physical cards and that Gen-Z (ages 18-24) are actually buying more cards than other age groups.

Meanwhile, we think Card Factory can continue to take share as its scale and value proposition helped it weather covid better than its boutique peers (several of which went bankrupt and are dramatically cutting store counts).  We think 2022 can surprise to the upside as foot traffic continues to rebound. Liquidity concerns are behind us at this point, and it doesn’t take aggressive assumptions to see material free cash flow, resumption of the dividend, and probably multiple expansion to something like a 10-12% free cash flow yield on 2022's GBP $60m.

Although currently paused, dividends & special dividends likely will be back.  In the meantime, the free cash flow is there and being used to improve the balance sheet.

Bull case, this is not a dying industry and CARD is the apparent organic consolidator.  If that optimistic take on the industry is wrong, CARD still has an opportunity to grow for 10+ years as it gains market share. CARD is also going online, with ~10% of 2020 sales online and another 3-5% through channel partners.

Sorry we're a week late posting this one.

Catalyst

A strong rebound in SSS in 1H or 2H21.