Card Factory: Setting a strong foundation for a bricks-and-mortar success story

Despite some strong competition in a small market segment, Card Factory remains one of the most inspiring success stories on Britain's high street today. The greeting cards sector has been hit by significant shifts in consumer habits in recent years, both online and in the high street, but Card Factory has evolved its offer accordingly and has become the dominant operator in the sector, by a considerable margin.

Its latest results (Q1 to 30 April) paint a positive picture, with sales growth of 6.5%, slightly below the 7.5% achieved in the same period last year. The group admitted softer like-for-like sales than previously achieved, directly attributable to lower levels of footfall. Card Factory is the latest in a line of retailers to pinpoint weak consumer confidence and sharply reduced high street footfall on weaker-than-expected results.

A winning mix

Despite these negative factors, Card Factory remains, in our view, extremely well-placed to weather headwinds in the sector. A key advantage is its low price proposition, aided by its vertically-integrated business , which acts as a natural barrier to entry, and enables Card Factory to deliver class-leading margins.

Card Factory continues to invest heavily in developing its online proposition , via both Getting and its recently launched eponymous website. Online sales account for c.5% of group turnover, but we see potential for this channel to account for a much larger proportion of sales going forward.

Longer-term objectives

Card Factory benefits from the UK having the highest level of per capita card consumption in the world , but we believe there are longer-term issues regarding how much further the business can develop in the UK. Management have a long-term target of 1,200 stores domestically; with Card Factory opening around 50 stores per year, it will reach saturation in less than a decade. We believe it has two options:

A shorter-term objective should be acquisitions, which can help Card Factory to both extend its offer into the premium segment and new sales channels. Both Scribbler and Cards Galore would be ideal targets , they have a near-exclusive Central London presence and around 25% of Cards Galore's stores are in transport hubs, two areas where Card Factory currently lacks a presence.

International expansion is a longer-term opportunity, though fraught with higher risks. North America, with high levels of per capita card consumption, could be an opportunity, as could certain European countries, such as Germany, The Netherlands and Spain, where Card Factory's value proposition would sit well.

Card Factory has a lot going for it, and we have plenty of confidence in the ability of the management team to successfully steer the retailer through the current choppy waters it is facing. Costs are being tightly controlled; the proposition is very focused; and the UK's love affair with cards, just like Card Factory's ongoing success, is unlikely to end soon.

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