Card Factory slumps as it warns earnings will be hit by margin pressure

Card Factory shares slid on Thursday even as the company hailed a “solid” Christmas trading period, as it warned that continued margin pressure will limit any earnings growth for this year.

The company said it now expects underlying earnings before interest, taxes, depreciation and amortisation for the year to be between £93m and £95m, down from £98.5m the year before.

In the 11 months to 31 December 2017, total year-to-date sales grew 5.9%, up from 4.3% growth the year before, while like-for-like store sales were up 2.7% compared with a 0.4% rise in 2016.

The company opened 48 net new UK stores in the period, bringing the total UK estate to 913 stores at the end of last year. Card Factory said it has a good pipeline of new store opportunities and remains confident of continuing its historic opening rate of around 50 net new UK stores per year.

Including sales from cardfactory.co.uk, total year-to-date like-for-like sales grew by 3%, up from 0.5% growth the year before.

Meanwhile, the sales performance over the Christmas period at gettingpersonal.co.uk, the group’s online personalised gifting business, was “disappointing”, resulting in a broadly flat sales performance year to date.

Chief executive Karen Hubbard said: “Karen Hubbard, Card Factory's Chief Executive Officer, said: "As I approach my second anniversary with the business, it is pleasing to report that Card Factory has traded well through the competitive Christmas trading period with customers once again responding positively to our card and non-card ranges. As a result, like-for-like store sales have improved in the year to date.

"As we have reported previously, the group has faced significant cost pressures in the year; these, together with the further change in margin mix given the ongoing out-performance of lower-margin non-card categories, are reflected in our expected outturn.

"We anticipate that the combined impact of foreign exchange and wage inflation in FY19 will result in £7-8m of additional costs; whilst we have plans to mitigate this impact as far as possible, we recognise that against this backdrop, any EBITDA growth for the year is likely to be limited. Looking further ahead, cost headwinds should ease unless there is a further dramatic shift in sterling.”

Investec, which rates the stock at 'buy', said: "Whilst it is disappointing that there has been another downgrade, Card Factory has a robust vertically integrated business model and management has an action plan to improve performance. The valuation does not reflect the strength of the business model, strong cash generation, an advantageous lease structure and low capex."

At 1410 GMT, the shares were down 17% to 233.60p.