Card Factory plc

Welcome to our presentation of the interim results for the half year to the 31st of July. In the presentation, Chris and I will briefly comment on the detailed announcement made earlier today. Whilst the presentation is pre-recorded, there will be a live Q&A session at the end. The results are in line with our COVID-influenced expectations. Stores like for like at down 4.4% and online at 64% growth are both encouraging. Costs and cash have been tightly managed. Funding headroom has been secured. The CEO search is progressing satisfactorily. Turning now to performance since reopening, the most recent trading weeks have been very encouraging at stores down just 6.9% with improving trend on transactions and a very solid average basket value. Online also continues to perform strongly even now that all stores are open. The new platform is performing well, offering much improved shopper experience, and there is an ever increasing breadth and depth of curated range. Our partnership ambition is progressing with several active discussions with potential partners. Clearly, in the last six months, we've all been focused on COVID-19. In our case, our response has been centered on three elements. An RFCF renewal predicated on three new covenant tests that will apply through to June 2021. There remains an opportunity to access CCFF. During the period we have taken advantage of all government financial support and as would be expected there's been aggressive management of cash and costs.

Okay, just in terms of the financial performance and summary for the half year FY21. Overall revenue was £100.5 million. That was £95 million down on the prior year due to the impact of COVID. While stores like for like, revenue performance was minus £4.4 million. Online was plus 64.4, making the overall group like-for-like revenue of plus 1.6. Underlying loss before tax was 22.3 million, while net debt was 143.9 million, 26 million lower than the same time last year. And overall net debt, including lease liabilities, was 290 million, with an average lease length now down to 2.3 years. Turning to the like-for-like sales performance, as I mentioned, 64.4% was the combined online performance in terms of sales growth for Card Factory Online and Getting Personal, and minus 4.4% was the high street performance of our stores, given the net positive 1.6% over the period. Focusing purely on the store's performance, there's 102 million drop in sales again because of the Covid impact and certainly seasonal performance was affected by store closures in particular the seasons of Mother's Day, Father's Day, Easter and Thank You Teacher. Other direct costs were slightly up largely because of some of the additional measures that we've taken in relation to Covid and also the fact that it was as a proportion of sales because of the sales drop the percentage increased. leading to a underlying profit for tax loss of 23 million. Turning to the online and multi-channel performance, as we said, 64.2% was the growth for online. That breaks down over the period of a plus 155% for Card Factory Online and a plus 32% for the getting personal business. During the closure period, we did see Card Factory Online perform at over 200% LFL. year-on-year and in terms of getting personal over 60%. The other steps we've taken in terms of getting personal is to focus more on the return on investment in terms of pay-per-click and returns and in the online space for Car Factory Online we're more than doubling the amount of SKUs for that business. Overall the profit for the period before tax was 0.5 million into profit compared to a loss in the previous year. Now turning to partnerships, overall revenues were in line with where we'd forecast them to be, expectations for this year. We did see a dip in terms of the reject shock because of the impact of COVID. But overall, like I say, we are in line with where we expected to be. Margins are slightly lower in the period because of some of the one-off upfront marketing costs related to some of the partnerships. And this does include an allocation of central overheads. But overall, profit and revenue was in line with expectations for the half year. In terms of the profitability of the group, this was impacted by COVID-19 during the period. and I'll now run down in terms of the margin and cost impacts. Turning to the costs of goods, overall there was a 340 basis points impact, largely due to the stronger performance of online compared to the stores around product margin. In addition, there were further COVID related measures that were taken in terms of the supply chain, and some additional stock provisions because of the interruption to some of our spring seasons. Store wages overall reduced by £16.2 million down to £23.7 million. This was largely driven by the job retention scheme receipts of £15.6 million in the period. Store property costs were also £6.3 million lower, down at £6.9 million, which was largely due to the business rates holiday. And other direct expenses were down £1.9 million to £8.5 million due to additional cost control measures that we've taken as a business. Likewise, operating expenses also reduced by £0.2 million. Overall, this means that as a business, cost savings were in excess of £24 million during this period. but overall because of the covid closures the loss before tax was 22.3 million turning to the positive free cash flow in the period even though we've had the impact of covid and closure for several months the business did generate positive operating cash flow of 8.4 million and a positive free cash flow of 1.1 million within these numbers it should be noted that there are deferrals of rent vat And better creditor terms that amount to £26 million in terms of timing. And there has been further payment holidays of permanent benefits of the rates and furlough in the period of £23 million. However, to deliver a positive cash flow with the period and level of closure we had, we believe is a good result. Turning to CapEx now, it's been tightly controlled in the period while still having the view in terms of supporting the five-year strategy. The overall CapEx spend in the period was 3.5 million. The big areas of spend really, it was 0.6 million around the completion of the new platform that launched at the beginning of July for Card Factory Online. Supply chain of 0.7 million which is to improve the efficiency through voice picking and also the ongoing operating expenses reduction by the consolidation of our distribution centres. And then other recurring costs around Covid, there was about 900,000 around extra equipment in store to make sure we had good social distancing measures. In terms of the guidance for FY21, we're guiding to circa 10 million in terms of capex for the year, which is lower than previous years but does include the key support for some strategic initiatives around a new ERP system, increased online capacity and other developments within the vertical integration supply chain. The dividends and capital policy largely has not changed from what we said at the capital markets day. There was no FY20 final dividend. and there's no dividends currently expected in FY21 as we look to protect the balance sheet in these uncertain times. The overall capital policy in the medium term will not change from the one to two times pre IFRS 16 EBITDA, just that we're moving now to the more sensible PBT leverage of 1.2 to 2.6 on an equivalent basis. The liquidity of the business as Paul mentioned earlier is in a good place in terms of we've got the £200 million revolving credit facility and we year on year lower in terms of the overall leverage of the net debt level that we've got in the business. We also have access to the CCFF of the Bank of England if required. And just to reiterate, we do have replacement covenants on a monthly basis until June before returning to normal covenants on total net debt, monthly cash burn and last 12 months underlying EBITDA, which is tested from September. As we currently stand today in forecasts, we have plenty of headroom within these covenants. So the board overall is confident that the group has access to sufficient liquidity for navigating the times ahead. But in the short term, given the current level of uncertainty in relation to COVID-19, it is not possible to give guidance as to the expected out-term for the year at this point.

So moving to a brief update on the progress we've made against the strategy that we shared at the end of July. I have on the chart the three chevrons that reflect the core of our strategy and just want to briefly touch on progress in each area. With regard to leadership in card choice, we have, as you would expect, been optimising ranges and space to ensure that density is maximised and we continue to be very focused on newness, both in terms of category new occasions, but also within existing category design and verse. We have been very focused on a new price architecture and strategy that will allow us to take advantage of price elasticity and increase prices as and when we think appropriate. As we've mentioned before, test, trial and result is an integral part of that pricing strategy and we will continue to run those tests throughout the coming year to year and a half. Innovation remains at the very heart of our complementary category development. We're reducing the breadth of the category components and therefore focusing on fewer and better categories that complement our core drive against leadership in car choice. Those decisions, both in terms of card but also complimentary, are informed increasingly by our shopper profiles and we're using the data and the analytics across all aspects of our customer proposition to ensure that we prepare and provide the best solution that our customers are pursuing. With regard to our store estate, as Chris has already mentioned, we've effectively paused the rollout due to current conditions, but our pursuit of additional distribution points by partnering with both national and international partners continues to be a key focus and we're actively pursuing a number of opportunities at the moment. With regard to e-commerce and multi-channel, we've referred already to the successful launch of our new platform that significantly enhances our customer experience and the mobile app and click and collect are to come imminently. With regard to our vertically integrated manufacturing and supply chain, We continue to build capability and capacity. We've already mentioned the investment we're making in fulfillment for online, and that will continue through the coming year to two years. Leadership engagement and capability within the business continues to be a clear focus, as does performance management, where KPIs will be anchored to strategic objectives and reward programs will also be linked to those. Additionally, we continue to have a very clear view about our positive impact programme where our ESG programme is consolidating and building on existing initiatives throughout the business. Clearly Christmas is a critically important season for the business and I'd like just to give a brief overview of the preparation. We've seen already initial evidence of Christmas starting early, not necessarily completely nationally but in large geographies. and as a consequence we are managing phasing with great agility. We have a significant proportion of Christmas stock already in card factory distribution centres and the recruitment of a large number of temporary colleagues is well underway. We remain very confident that our preparation is sound, focused and will meet the customer expectation. Moving now to a summary of the announcement we made this morning. The results are in line with our expectations, but do reflect the impact of store estate closure during the COVID lockdown. We're pleased that there's a net debt reduction due to the successful management of our cost base, working capital and investment. The new cardfactory.co.uk platform has been successfully launched at the beginning of July. The refresh strategy that we have developed and presented at the end of July is progressing very well. And the planned investment to leverage and enhance our vertically integrated business continues with great focus. As we think about the outlook, as you will have already heard, the stores are trading well since reopening and more recent like-for-like trends continue to improve. That's equally the case with our online business where Card Factory is showing a almost 72% like for like growth in the last four weeks. Christmas preparation is focused and very strong. Our partnership channel continues to trade in line with our expectations. Although we have to recognise both nationally and internationally the short-term uncertainty from the pandemic impact, consequent local restrictions, and how that affects customer behaviour. We are very confident that the new strategy will deliver sustainable growth and shareholder value and we have both at the end of July and today demonstrated the clarity of our strategy and how we believe it will enable us to drive our position in the market. As Chris has mentioned, FY20Y1 guidance has been suspended But our next scheduled trading update will be on the 14th of January next year. So at that point, I'd like to close the formal presentation and Chris and I will now be available for any questions that you may have. Thank you.

Thank you. We've had a few questions from the webcast. And just as a reminder, if you'd like to ask a question via webcast, please just press the submit button at the bottom of the toolbar. So our first question is from Martin Silverman. who's asking if future growth appears to be heavily based on new partnerships. So how likely is it going to have a negative impact on the retail footfall on your long term plans?

Martin this is Paul here so I'll take that question. I think your observation is clearly accurate that there is a current impact on a high street footfall but if you look at the partnership that we've established with Aldi they clearly have I think recently talked about expanding their number of stores and they've talked about the percentage of their business that they believe will continue to be as it were physical rather than an impending online entry. If we look at the business in Australia with the reject shop, we've seen them recover very quickly from a COVID lockdown, so consumer and customer behavior in that market is still strong. I think it's inevitable that COVID will have an impact across all businesses, across all territories in the near term, but we're confident that the partners we choose to work with are strong and leaders in their sector or their category, and we would be clearly expecting that the success we've enjoyed with both Aldi and the Reject shop can be replicated, albeit with the inevitable slight early drag of the impact of COVID.

Our next question is from Jonathan Pritchard from Peel Hunt, who asked, in your strategy day, you gave a clear roadmap as to how you plan to get 20 plus P of EPS in the mid 20s, yet the shares are below 40 P, suggesting the market is sceptical. What pushback are you receiving from investors to explain this scepticism?

I think from post the capital markets day, the feedback has been very positive in terms of the plan and some of the detail we give. The bit internally we've got is all the exec board are absolutely 100% behind that plan. We've got detailed KPIs of how to deliver that five-year strategy. In terms of the market being scheduled, I think the bit for us as a business and for the exec board is to make sure what is in that plan is delivered. And that's where our focus is at the minute and obviously navigating through COVID. So even during this period of uncertainty, in terms of the things, the five year plan, you know, everything remains on track at this point.

We have a follow up question from Jonathan, who's asking, what is the like for like performance in August to compare with the minus 6.9% in September?

We haven't given a month-by-month like-life performance. What we did give, though, was the trajectory in terms of how that position was improving. So overall, what we have seen is transactions have been recovering steadily, while average basket value has remained fairly consistent around that 23%, 24% in terms of the average basket value growth. So we said in terms of since the reopening that sales on the like-life basis were minus 13%. And in the last four weeks we've seen that drop to just under 7%. The trajectory is good. Clearly we're monitoring any potential local lockdown, but so far that recovery is still continuing.

Our next question is from Kate Calvert from Investec. Who's asking, can you talk about how much the card factory range has increased to date? And should we expect another major partnership to land in the next six months?

In terms of the online piece, obviously we launched that at the beginning of July. We're still expanding that range, so we're still only partway through that. So we're still seeing good growth since the reopening of stores, plus 72% in terms of the car factory online. So we do think there's more capacity in there in terms of improving that further. And the plan is pre-Christmas that will have doubled the amount of SKUs that we've got online.

So our next question.

Sorry, just to answer the second point of Kate's question around partnership in the next six months. As I said in the presentation, I think we said consistently that there are a number of conversations that we're involved in with retailers, particularly in the UK. I think it would be advisable for us to give some prediction about when they will lock down to a deal. I think it's fair to say that the success that we've enjoyed with Alvi and the success that we've demonstrated with TRS in Australia have been really good, almost test cases or benchmarks experience for other retailers and have led to some good and interesting conversations. So can't give any commitment now, but it's certainly a piece of work that we're very focused on.

We have a question from Stuart Houston. who's asking, my local Midlands radio station has an advert for Moon Pig twice every hour. When will Cars Factory start to nationally advertise its lower cost online proposition?

This is Paul. I'll pick that question. Yes, I live in the Midlands and I'm probably also hearing those same Moon Pig ads that you've just described. As Chris has talked about in the last question, the carfactory.co.uk platform was launched successfully at the beginning of July. We continue to build both the depth and breadth of range, both in terms of personalised and non-personalised. We have a growing capacity to fulfill online demand and we certainly have a plan to market more directly the .co.uk platform. It's unlikely that we will be doing that in an above-the-line sense, so using radio or TV before Christmas. But there is in Trane a very strong program of social media marketing around the Cardfactory platform and also given that we have just over a thousand stores open, one of the mechanics that we're using successfully is to draw to the attention of our store-based customers the opportunity that they have to buy online from Cardfactory both the range that clearly we carry in store, but a significantly broader range that we carry online. So I think that we're taking a considered approach to above the line advertising for the online offer, but certainly it is clearly part of our plan as we move into the next calendar year. Thank you.

We have a few questions from a private investor. Firstly, where do you see the overall debt going over the next two years? And the second question is, how do profit margins with partners compare with shop sales?

So in terms of debt, obviously we have been managing the debt. The reason why we've sold 26 million lower than where we were last year at the interims. The plan clearly in this environment is to make sure as a business that we're not over leveraged. So our focus at the moment is rebuilding the balance sheet, but also delivering the five-year plan. In terms of future dividend payments, that'll be announced at a later point. But clearly at the minute, our focus is on dealing with the COVID situation, delivering the five-year plan. and making sure we secure the balance sheet. In terms of margins on partnerships compared to our high street stores, so yes, I mean obviously the way the structure of them deals works is we do sell, say, an example of a 99p card at a lower price point, so there is a margin for the retailer. And so overall, the product margin would be lower. However, we have the offset benefit of that, which increases the margin percentage because we've not paid rent rates or all the occupational costs and staffing costs for them units. And it is a very capital life. So the partnerships are still a very important part of the strategy and delivery of the long-term five-year profits.

And we have a follow-up question from Jonathan Pritchard from Peel Hunt. He'd just like to clarify that you suggested that the partnerships impacted your own store sales.

Jonathan, this is Paul here. That wouldn't have been our intention. I think the evidence that we've now built over an extended period in particular in relation to Aldi, is that there is no cannibalisation without existing store estates. So given the ambition that we had to get car factory product in more points of distribution, the Aldi experience, even where Aldi stores are trading in reasonable proximity to one or indeed more car factory stores, we see no measurable cannibalization of our business. So it kind of underpins part of the strategy when we talked about giving customers more opportunity in more places to access car factory, and that's working well for us. So no, there is no cannibalization with the partnering stores.

We have a question from Daniel from Arthas, who's asking, how is pricing developed recently? For example, the four weeks until September 20th. Is average selling price per card similar to the same period last year, or have you increased or decreased prices?

Yes, obviously, as part of the five-year strategy we mentioned, there was going to be a number of commercial initiatives. There would be some price movements. We mentioned about the 59p to 69p. But in terms of year on year, the number of price changes is very limited. So in terms of the life-to-life performance, that's not influenced by any major price changes compared to the same period last year.

That does all the questions from the webcast. And I'll hand over to Paul for closing remarks.

Okay, thank you everybody for joining the webcast. I appreciate today's a busy reporting day, so thanks for committing some of your time to Cardfactory. At moments like this, one's tending to re-present again the entire presentation. I won't do that, but I do want to say that the business is very confident in the strategy that we outlined at the end of July. The store reopening program has proven to be very successful. As Chris has mentioned, the trajectory on all key measures of performance is positive. And of course, as I said in my quote in the announcement, we are now absolutely focused on a flawless execution of Christmas and the development of the execution and implementation of our strategy. So thank you very much. We will be speaking to the market again in the middle of January. Thank you.