Today, I bought shares in the highstreet and online card retailer Card Factory following 18.53% share price drop after announcing ‘disappointing’ half-year results.

If you’ve checked out this scary share price graph, you’re probably wondering what the hell happened?

Keep reading to find out.

I’m not usually a small-cap investor, opting instead to avoiding such sharp one-day declines characteristic of such ‘growth stocks’ when there’s even a slight miss on earnings or headwinds. But, Card Factory shares look tasty to me here, so I bit!

Why did card factory shares drop so sharply?

Card factory shares dropped sharply due to a 14.1% drop in pre-tax profits from the H1 FY17 of £27m to H1 FY18 of just £23.2m.

This brings Basic EPS down 13.5%  to 5.35p from 6.45p over the same period, a seemingly worrying drop of a penny.

I can certainly understand the concerns of sellers as Card Factory costs have increased significantly due to the ‘living wage’ and also currency headwinds.

As the above table shows, store wages have swelled by a massive 10.7% and the costs of goods sold up by 11% (due to the weaker pound sterling). These increases represent a somewhat worrying rise of 0.8% and 1.4% against revenue respectively.

My main worry is that Card Factory is an incredibly price-sensitive business with obvious price ceilings with cards sold at 29p, 59p and 99p. Consumers have showed marked resistance to the increase of cards above these prices. A card selling for £1.09 as opposed to 99p is likely to have an adverse affect on sales. If wages continue to rise at the current pace or faster (as they would under a Labour government for example) and the pound shows continued weakness then Card Factory will find their margins closing very quickly.

But, I see clear opportunities ahead with a very impressive 30% growth in online Sales (although from a low base) and the expanding revenue an encouraging sign of demand for Card Factory’s products. Although the price of cards have clear price ceilings, there is always the probability of an increased focus on cross-selling products such as balloons, mugs e.t.c where Card Factory can afford to pass the costs on to the consumer.

Furthermore, like-for-like sales continue to drive upwards with an increase of 3.1%, and 30 new UK stores opened.

CASH TO SPARE!

Despite the fall in profit, Card Factory continues to generate a strong cash flow with the board deciding to return £51m of excess cash to shareholders through a special dividend of 15p a share. Management also hiked the interim dividend by a healthy 3.6%. By including the special dividend, Card Factory shares boast a dividend yield of over 8% (3% exc Special Dividend).

This strong cash generation is evidence of Card Factory’s ability to fund organic growth, new ventures and pay down debt if needed.

Although the retail market remains unpredictable, a growing company that pays a handsome dividend at a p/e of 18 is certainly worth a smaller speculative investment of £500. Card Factory shares now represent 4% of my portfolio.

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