Card Factory plc (CARD) Earnings Call Transcript & Summary

Welcome to our preliminary results update for FY '22. I'm Darcy Willson-Rymer, CEO of Card Factory. And joining me today is Kris Lee, our CFO. Kris and I will shortly provide the financial performance update for FY '22. And I'll then provide an update on delivery progress for our Opening Our New Future growth strategy, and then, the outlook for the year ahead. Let me begin by saying that having now completed my first full year as Chief Executive of Card Factory, I've been impressed by the potential from the design, print, manufacturing and retail capability as well as the culture of the business. And I'm optimistic about our opportunities for growth. Card Factory is a company that is loved both by customers and colleagues. And there's an energy from our colleagues to do the right thing, which was reflected in our FY '22 performance. Reflecting on FY '22, there were a number of operational priorities that we addressed. As lockdown ended, we ensured the stores reopened and traded as strongly as possible. We actively responded to supply chain pressures to mitigate trading disruption. And the fact that we have our own in-house design, print and manufacturing capability proved its worth through FY '22. We reviewed and updated our Opening Our New Future growth strategy. We successfully completed Phase 1 of our ERP implementation and our leadership team capability has been strengthened with new talent. And we accelerated the evolution of our culture within Card Factory. And finally, as you see within our results, we ensured we had the right financial structure in place. All of this was reflected in our FY '22 performance. We saw sales recovering steadily after lockdown. This enabled and improving top line performance of GBP 364.4 million for the 12 months to the 31st of January, 2022 or our financial year '22, which was a 28% increase year-on-year, driven by growth in store sales. The steady recovery of store performance of plus 33% year-on-year reflected a 20% increase in the number of trading days compared to the prior year and a recovery in our market share. Online sales were ahead of pre-pandemic levels at plus 23%, reflecting the expansion of our product range online and improved customer experience as well as an accelerated shift in consumer behavior. Profits were ahead of management expectations. Despite significant inflationary and supply chain headwinds, with a PBT of GBP 11.1 million versus guidance of GBP 7 million to GBP 10 million. The business remains highly cash generative, with significant reduction in leverage during the year. The focus on building the financial strength of the business was seen through the strong operating cash flow, which was up 42% versus the prior year to GBP 114 million excluding lease liabilities. We ended the year with improved balance sheet strength with closing net debt excluding lease liabilities of GBP 74.2 million compared to GBP 107.7 million in FY '21. Finally, we're pleased to have successfully refinanced the business with our banking partners as announced on the 21st of April, 2022. And the revised agreement removed the obligation on the group to use best efforts to raise further equity to make prepayments of the debt facilities. So to discuss the refinancing and full details of our financial performance, I'll now hand over to Kris.

Thank you, Darcy. I will now give you the update on the financials for FY '22 for Card Factory. So the revenue overall grew by GBP 80 million during the period, as we've seen a steady recovery in store performance following the easing of lockdown restrictions. Stores LFL was minus 5.7% against FY '20, while online like-for-like revenues for Card Factory were minus 1.5%, with a combined position for Card Factory of minus 3.9%. The profit before tax for the period was GBP 11.1 million. This is ahead of the GBP 7 million to GBP 10 million guidance that we did give in January. And net debt has come down considerably, excluding lease liabilities to GBP 74.2 million. This is nearly half where we were in January '20 of pre-pandemic. And net debt including lease liabilities is GBP 193.7 million. So, just moving to the like-for-like sales performance. We've still seen on the high street that portfolio is subdued. So in the period, we've seen transactions reflect that in terms of minus 23% and average basket values have remained strong, up plus 22% during the period since reopening in April '21. Card Factory online at minus 1.5% was against a tough comparative of 135%. Bearing in mind that FY '21 had 5 months of lockdown period where people went online to shop. Moving to the divisional analysis. Revenue overall in the stores was 33% up on FY '21. We've got a consolidation evolution of the store portfolio in line with changing shopping habits. We've added a net 4 stores to the portfolio to 1,020. Even post-pandemic, we've now seen only circa 2% of stores are marginally loss-making. As part of our monthly review in the property reviews, we do address these in terms of a plan of action and relocations. Trading has recovered particularly strong through the year, especially into December, where we've seen like-for-like on December '21 against '19, get to minus 1.4%. We've also introduced the first new model store in Coventry with featuring improved customer flow, store navigation and operational efficiencies. And we plan to open a number of more of these stores as trials during the financial year. I think the store performance that reflects the strength of the Card Factory brand and underlines the importance of stores as part of the wider omnichannel strategy. Moving to online. I've touched on the minus 1.5%. The key areas where we've seen strong performance in Card Factory is around non-personalized cards as well as gifting parties and balloons as people have shopped online and reintroduced parties. The other area in terms of Getting Personal was a bit more subdued at minus 21%. This really reflects a couple of things. One, which is around the -- what we positioned previously about backing profitable sales and pay-per-click transactions, which have a decent return on investment. And then, there's an element where we transition in Getting Personal onto the new platform, which is expected in late H1 in FY '23. Just in terms of partnerships, partnerships GBP 4.6 million, were down on the previous year, but in line with expectations. So the reduction is mainly due to The Reject Shop and based on the lockdown periods that we're seeing in Australia. And we've seen Aldi maintain year-on-year flat sales and bearing in mind the 5 months of lockdown in FY '21, where people were shopping more in essential retail as well nonessential retailers were closed. So we've seen a robust performance in partnerships. And we've now got a new business development director, who is leading that strategy. Looking at the margins of the business over the period, the product margins were strong in the period up plus 4.4 percentage points, 0.4% of this was around currency gains in terms of the FX blended position and then 4% has come from the realignment of stock provisions alongside the improved stock management. Store wages increases aligned with where we expected with National Living Wage and some of the offsets in productivity gains. While property cost increase reflects effectively the fact that there has been less rates relief from the government in FY '22. While direct expenses have increased in line with the increase in sales and operating expenses reflecting the investment that we've made in the IT infrastructure and an element in the prior year benefiting from CJRS in terms of government support in lockdown periods. But overall, that means the EBITDA for the period was GBP 85.6 million against GBP 45.8 million. Overall, nearly doubled the profit of where we were last year. And in addition to that, if we look at the depreciation line now, you've got the right of use of assets, the rent charge goes through that line. That has also reduced down to GBP 37.3 million against GBP 39.6 million in the previous period. Net financing expenses were higher than the previous year. This reflects the refinancing that we did in May '21. And it also reflects the refinancing options that we explored before the refinances that we announced on the 21st of April this year. But overall, profit of GBP 11.1 million, profit before tax against the GBP 16.4 million loss in the prior year. Importantly, looking at cash flow. So the benefit of the increased profit, but one of the key callouts I want to make is net working capital. Net working capital over 2 years, we've managed to improve that by GBP 62 million, which obviously has benefited in terms of reducing net debt position of the business. Other lines, you'll see on the CapEx, GBP 6.6 million, GBP 7 million last year. This reflects the control of cash and CapEx that we made during the COVID impacted periods to preserve cash. And lease liabilities, you'll see at GBP 54.8 million (sic) [ GBP 54.5 million ] against GBP 22.1 million. That reflects GBP 19 million of deferred rents from FY '21 into '22. So when looking at free cash flow, free cash flow was more positive than FY '21 at GBP 42.5 million against GBP 36.1 million. And underlyingly, we took an additional hit in the year of GBP 19 million of rents. So the underlying position would be near GBP 61.5 million. So this is the reason we've seen net debt tumbled by the year-end. Turning to the liquidity update, 4 key points, really. We've delivered the refinancing. This draws a line under the liquidity concerns and gives us sufficient headroom. We've also removed the obligation for any equity raise. And we've got a new financing facility through to September '25 to support the 5-year strategy. Obviously, there's been a lot to talk about inflation and headwinds. So we expect in FY '23, that revenues will recover towards the FY '20 pre-pandemic levels. And as previously guided, expectations for significant inflationary headwinds to continue through FY '23. The key areas for Card Factory around freight costs, fuel, National Living Wage and energy. We have taken proactive action on these areas and mitigate a significant proportion of them with a combination of efficient management of costs and working capital as well as targeted price increases. So the expectation in FY '23 on revenue and profit remains unchanged. And FY '23, one additional point on CapEx. We do expect to spend circa GBP 23 million in this financial year. This reflects the areas for delivery of the strategy and the areas where we preserve cash, as I mentioned, in the cash flow over the last couple of years. The key areas of the ERP Phase 2 implementation with development of online that includes increasing our fulfillment capacity and efficiency, as well as the wider omnichannel offering and investment in stores. We're still going to invest in existing stores and new stores, circa GBP 7 million with a gross number of stores of around 50 and a net number of stores around 38 as we do look to do more relocations in the existing portfolio. And then just looking at an update on the current trading. So I think what we've seen in the first few months of the current financial year is that's in line with our expectations and has continued to recover our market share position, which is obviously key. But we are seeing a mix shift in our spring seasons, Valentine's Day, Mother's Day, towards everyday ranges, which typically represents, everyday represents 70% of our annual sales. We believe that shift may be more towards 73%. However bearing in mind that Mother's Day and Valentine's Day significantly less than 10% of the overall sales for the year. So overall, the performance through the balance of the year, we believe will increasingly benefit from the planned strategic improvements include an expansion of our market share in complementary categories, rollout of trial store and targeted price increases. These 3 key initiative areas; pricing increases, authority in complementary categories. So these include soft toys. We've introduced books. We've introduced confectionery and chocolates. The third one is leadership in card choice, key areas refreshing the ranges and new price points. So particularly around wedding, female and open, we'll be looking to refresh those ranges. That's the conclusion of the financial update. And I'd like to pass back to Darcy for the strategy update.

Thank you, Kris. This will be the first strategy update since our revised Opening Our New Future growth strategy was announced in September. I appreciate that not all of you could attend that update. So I'm going to begin with just a brief recap. I'll then go into more detail about key milestones we've delivered and our priorities over the coming months. So in summary, it is clear that the right way forward is to transition Card Factory from being a store-led card retailer into a market-leading omnichannel retailer of cards and gifts. Through this strategy, Card Factory is well positioned to become the U.K.'s #1 destination for all customers seeking unrivaled quality, value, choice, convenience and experience. We're working to transform Card Factory into a leading omnichannel brand in our space to help customers celebrate each and every special occasion. And it's our aim to become a global competitor putting cards and gifts in the hands of more customers. As outlined at the time of our interim results in September, we will be building on our existing quality and value heritage to take Card Factory on a journey that provides our customers with more convenience by providing greater access to products wherever and whenever they want them. This will come through an improved digital experience and the transition to a full omnichannel business. The expansion of our U.K. and Republic of Ireland store footprint as well as growing international presence in countries which are prime for disruption due to identified gaps in the market for Card Factory's value and quality proposition. More choice by building upon our leading card offer to expand into complementary ranges. We'll continue to be a card-led value retailer in a stable market where 73% of U.K. adults are card givers. However, we will meet customer demand by providing greater choice through complementary gifting and party ranges, opening up an access to a large market with GBP 44 billion per annum in the U.K., which will be targeting GBP 5 billion, which is between 4 and 5x larger than the card-only market that Card Factory has previously focused on. Lastly, we've been delivering on an exceptional customer experience through improved data capabilities for understanding the customer, brand investment and ESG investment. We'll develop a culture of accountability with colleagues empowered to make the right decisions for the business with a shared understanding of its identity, strategy, vision and values with a diverse, inclusive and socially responsible business. Delivery of our strategy is now underway and some significant milestones have already been achieved. We've strengthened our leadership team with appointments into key roles of Chief Information Officer and Digital Director, recognizing the critical role digital has to play in our business growth as well as a new Business Development Director to lead our partnership strategy. In addition, we have also appointed Card Factory's first Customer Marketing Director to oversee our new customer marketing function. These appointments bring significant experience to our leadership team and will ensure that we have the right capabilities to drive the next stage of our growth. Regardless our strategy delivery milestones, these include opening our first new format model store in February 2022. The Coventry store features better use of stores space, improved customer flow and navigated through the store whilst also improving operational efficiencies. Results from the store have been very promising. And we're confident that similar results can be achieved as more trials stores are opened. Transitioning both online platforms, cardfactory.co.uk. and Getting Personal.co.uk onto a single unified platform, unlocking cost benefits and opportunity to significantly expand the cardfactory.co.uk gifting range. Looking ahead, our focus for the next financial year is creating growth opportunities around the store estate and building out our wider capability. Key milestones include: building upon our existing leadership in party and balloon categories to expand our market share in our stores within complementary categories such as stationary and confectionery. This will not come at the expense of cards in store. It's about making smarter, more agile choices about the space dedicated to complementary categories. Completing the rollout of trial model stores so that we can prepare for a wider rollout from FY '24 while taking valuable learnings into the existing store estate as we get them. And for new store openings, we've identified a profitable route for opening our first stores in Central London. In addition, having enjoyed profitable success with our first 14 stores in the Republic of Ireland will continue our expansion plans with a further 5 stores already identified and additional openings planned. More broadly, in terms of the wider capabilities we need to put in place to deliver on our strategy, we will trial the ability for shoppers to click & collect any product from our online or app platforms for collection in store. And this is the first step on rolling out our omnichannel capability, which we believe provides the opportunity to leverage our brand, our store estate, our vertical integration and our quality and value proposition and our investment in our online channels to materially increase our share of the online market. We will deliver the second phase of our ERP already live across the finance function. The new ERP system will underpin the growth strategy across the entire business, allowing us to understand and respond rapidly to changing shopper habits and preferences. It will provide the ability to view stock in all areas of the business, which is essential for omnichannel operations. It will also allow us to integrate with future partners, both in the card choice. Finally, to support maintaining margins, we have begun a highly targeted set of price increases across some of our products, which follows on from the success we achieved last year. We are carefully analyzing the impact on sales and further price rises on other SKUs are being actively considered. But we're going to do this all whilst maintaining our value proposition. Regarding our ESG focus, we are committed to growing our business in a socially and environmentally responsible way. We're making considerable headway in meeting these objectives. Highlights include; being on track to reduce waste with 90% of our products being free of single-use plastic and all of our products being glitter free by the end of FY '24. We're progressing well in terms of reducing our carbon footprint and we have an ambition to become a carbon-neutral business. From a social perspective, we launched our diversity, equality and inclusion strategy, which is making a positive difference for colleagues. For the communities we work within, the products we sell and the suppliers we work with. Our approach to career progression in talent management is progressive for all colleagues. And we continue to have a positive impact within the communities we work within and the charges we support through our Card Factory Foundation. All of which is underpinned by a rigorous approach to good governance. So in summary, as we look ahead, we are focused on building out our digital proposition and leveraging our store estate and brand heritage to transform Card Factory into an omnichannel business, allowing our customers to access our product anywhere and anytime they choose. We will continue to build on our success in complementary categories to address a GBP 5 billion gifting market. At the same time, we're also expanding our successful partnership model, both in the U.K. and internationally. All of which will continue to be built upon the strength of our vertically integrated model, which is a unique point of difference for Card Factory, allowing us to own every aspect of design, manufacture distribution and sales channels, both in store and online. We'll continue to build the financial strength of the business, which is highly profitable and has strong cash generation and is now underpinned by the successful refinancing. This means Card Factory in FY '23 will expect revenues will head towards pre-pandemic levels and our expectations for FY '23 revenue and profit are unchanged. We've taken preemptive action to help mitigate the inflationary pressures we are seeing across the business. And we will continue to monitor and respond to developing macro environmental pressures. Card Factory is now well positioned for longer-term growth, targeting over GBP 600 million of sales by FY '26. Delivery of this growth ambition is well underway. And we will make significant headway in the delivering of our opening our new future strategy this year. We are, therefore, excited by the growth opportunity ahead. And we continue to focus on implementing changes to enable delivery on our transition from a store led card retailer to a market-leading omnichannel retailer of cards and gifts. So thank you for your engagement and your time today. Kris and I will now be happy to take any questions that you may have.

[Operator Instructions] And we'll now take our first question from Kate Calvert from Investec.

Just 2 for me. First on the supply chain. Given your exposure to China and obviously the continuing sort of COVID restrictions, disruptions over there. What are you doing differently this year to ensure consistency of supply, particularly in the run-up to Christmas? And my second question is on your product margin percentage is still quite a bit below where peak levels were pre-COVID. Sort of where do you see that getting back to over the next 3 years?

Thanks, Kate. Yes. So I mean, in terms of China, as you say there is some exposure to China. So we have been monitoring that quite carefully. The bit we've looked at generally is in terms of assessing risk of the businesses where we can source all the products from so within Europe and other areas. I think that mainly in terms of the amount products we sourced already in terms of the seasons and Christmas, in particular, that we remain pretty comfortable with that. In terms of product margin, we made obviously note in the statement around -- we did provide for stock at the back end of last year and because of some freight issues that would have been widely noted in the press. And we ended up where we substituted some products. So there was a little bit of a tailwind of that provision. But I think if we're looking at better than the 4% we guided to in the no 4 percentage points difference. There's probably about 2 percentage points of that, which is in relation to a tailwind in the period. So I think product margins will remain, I'd say, 2% different, but there and thereabouts, I don't think the pre-product margins that we've seen back to those levels on the basis, we've introduced a lot of other categories. We've mentioned about confectionery, chocolates and other products in the non-card area. These are the things which are actually driving good cash sales. So the margin, like I say, I expect it to be about 2% difference to the current position at the year-end.

There are currently no further questions in phone queue.

Thank you, Savio. We've had a number of questions come in from the webcast. Our first question is from Adam Tomlinson from Liberum. Can you please talk about current stock position and availability levels? How comfortable are you? And where does inventory need to be?

So in terms of current stock levels, we've obviously made some investments in our terminals and basically getting line level, SKU level stock details in stores. So we've got a lot more -- a much better handle on the stock and availability. Off the back of that, we have managed to successfully bring stock levels down. So I think we remain comfortable at reduced stock levels that we see at the end of FY '22.

And please, can you give details on the CapEx setup in FY '23.

We'll not give obviously, a breakdown on the GBP 23 million guidance. But effectively, the key area is really around the ERP Phase 2, which is the core stock system, which will give us the full stock loop, which will improve our visibility on stock further. Also online investments so around online fulfillment, so actually the capacity and ability to fulfill orders better as well as investment in omnichannel and online. And then as I said, we're still looking that will be circa GBP 7 million, which will go into stores around 50 growth stores, 38 net and also relocations within that. Other areas, we'll continue to invest in is the vertical integration and new parts and obviously a competitive difference we've got there. So there'll be an element in there. And some of this really is where we've controlled cash in previous 2 years on CapEx. Some of the investment that was always part of the 5-year plan.

And can you give a bit more color on where the major investment is going?

As I say, the split between them and categories really. Yes, like I said, we'll not give any more detail than that.

His next question is, when you talk about price rises, can you help quantify what you have in mind and what you've seen the competition do so far?

So on price rises, obviously, we have done a number of tests in the market prior to making these changes. You see the impact on our volumes. So where we've looked at there's certain key price points, examples would be 59p to 69p would move to 89p to 99p, [ zoom ] 149p cards to 199p. The key point is that we're not just doing that just on a change of the tab on the existing card, we are looking to reengineer the cards and put more value into the card. And obviously, then there is on the non-card areas where we've introduced other categories, books, confectionary, chocolates and a different price points as well.

So Kris, I'm just going to add on the price thing. I think it's point. So first of all, back in September, I said that we would look to offset price through offset inflation through a combination of productivity and price, which is our strategy and we're doing. I think the other point on price that's important is maintaining the architecture. And so whilst we, as Kris has said, moved some of the pricing up to 89p to 99p for example. What we've looked to do is maintain logical price architecture. So we haven't changed our entry price point at 29p. But we have brought in higher price cards, so our exit price point in some categories type. So if you take wedding, for example, we've now put in a card that has more, more value, as Kris outlined, but with an exit price point at 299p for example. So it's -- in addition, it's about maintaining appropriate architecture and also looking at how we can drive spent.

[ Adam's ] last question is, you talk about having already mitigated a significant portion of inflationary headwinds so far. Can you please give some further details?

So obviously, one of the key areas has been freight. So as we look at the main inflationary as being freight, obviously, National Living Wage continues what we've seen on fuel prices. The freight piece, in particular, one thing we looked up in a lot detail is container flip. So obviously, maximizing containers and the time of when the containers are shipped makes an impact on the pricing. Obviously, in terms of in stores, we look to more efficiencies more where we can use investment in IT and technology to take -- to store to combat National Living Wage. We've hedged so 3 years out in the pre -- what's happened on energy prices, in that area. And on view, we've been in negotiations with a number of carriers in terms of from DC into stores and those contracts in terms of not taking the full impact of the fuel inflation through those negotiations. There's been a lot of other measures, but there are probably some of the big ticket things.

Thank you. We have had a number of questions come through from James Gilbert from Argon Capital. Firstly, can you please talk -- can you walk us through the buildup of your projected revenue growth in the medium term from each of your initiatives? How much from store openings range, market expansion online, et cetera? And can you give us guidance on medium-term operating margin targets in this context, please?

So in terms of the buildup to the project revenue in the medium term, obviously, we'll not give that break down in the market. In terms of the overall split where we target to get to in the next 5 years to FY '26 is for 20% of the sales to be through online and partnerships. And in terms of the margins, we guided previously in terms of the margins of where we were targeting in the future to get to circa a 17% PBT. So those guidance is remain intact. But clearly, with inflation where it is, those things will remain under review.

[Operator Instructions] We have no further questions. So I would like to hand back to our speakers for any additional or closing remarks.

I would just take the opportunity to thank everybody for their time and their attention today, and look forward to catching up with our shareholders in due course. So thanks very much, everybody.