Card Factory plc

Good morning. My name is Darcy. I'm the new Chief Exec for Carfactory and I'd like to welcome you to our preliminary results presentation for the year ending January 21. Let me kick off with my introduction. So I'm very pleased to have joined Card Factory and I'm joining at an exciting time. It's a much loved brand with great potential. The reason I've joined is to build on the great work in the past whilst unlocking the future potential that is within the business. As we all know, the things that made Card Factory successful for the first 20 years are not necessarily going to be the things that make it successful for the next 20 years. And my job is to preserve those things from the past that are essential for the business going forward. whilst making the necessary changes to unlock its potential. I've been with the business three months now and I've been focused on a few priorities. My first priority was to get over a thousand stores reopened and back trading after lockdown. There was a lot of work to do to get all of the old stock out of the stores the stores replanned and replenished with the new stock. And I think the team have done an amazing job at getting our stores ready for opening in order for us to welcome our customers and capitalize on the opportunity. And the second thing, I've been working with Chris and the team to get the refinancing complete and to ensure there's sufficient liquidity within the business. And then finally, I've been working on getting immersed into the business, coming up the learning curve and as meeting as many of the colleagues as I possibly could. And so far I've met about 500 colleagues in groups or in one-to-one meetings, including in store and video, some face-to-face. And I'm impressed by the culture in our business. We have a company where customers and colleagues love us and there's energy from our colleagues to do the right thing. Now, don't get me wrong, not everything is perfect, and I've uncovered the aspects of the business that need improving. But it's also been rewarding to talk with customers in store and see just how much they missed our stores being open and the great offers that we have. And when I speak to customers, they talk to me about the great value, the quality, but also the way our colleagues treat them in store. They rely on us to help them celebrate their special moments in life. And delivering on the customer experience has been at the heart of everything I've done across my career in leading and transforming a number of retail and consumer businesses. And it's clear that Card Factory has a solid platform for which to take the business forward. I spent eight years at Cost Cutter transforming that business into a destination convenience offer that now attracts leading independent retailers and shoppers from all demographics. And many of you will know that nearly 10 years ago, I oversaw the strategic review at Clinton Cards, and I was impressed then at how Card Factory had disrupted the market with its value and quality proposition and the opportunity is to recapture that energy and for CardFactory to lead the market. Lead not just in cards, not just in volume, but also in overall experience. And my aspiration is to unlock CardFactory's potential by applying the right strategic investments across the business. We can leverage our business model and unlock that inherent potential, but also to know and serve our customers better, strengthening our relationships by offering great value products and convenient shopping experiences that help them to plan and celebrate occasions, however they choose, through any channel. And we have the opportunity to do better for our customers. We have the opportunity to do better for our teams and partners. And in doing so, we will deliver better for our shareholders. A year ago, the business communicated the strategic plan that was outlined at the Capital Markets Day. And I think the shape across the three pillars of that strategy is right. We are working through the impact COVID has had on the plan, and we're going through each element and testing it carefully, including the timing, the phasing and the investments, and looking to identify any areas that we might have missed. It's early days, so there will be more to follow at the interims in September and thereafter. But Card Factory is fundamentally a solid business with a material and very attractive share of a large and broadly stable market. And we have a loyal customer base wanting to share and celebrate life's moments. Our business model offers distinct competitive advantage. It enables us to maintain our value proposition and excellent margins. It ensures we can react quickly to customer demand, but also pivot based on new customer insight. And we have the opportunity to continue to invest and strengthen that competitive advantage. I have seen the love shoppers have for what we do. However, we can help our customers to shop better with us, starting with however they want to shop, creating a more omnichannel experience that puts quality and value cards and gifts in the hands of customers wherever they want them. Of course, the stores remain an important part of how we serve our customers, but we know we can do more to improve the shopping experience in store. using our increased digital capabilities to bring the online and store experiences closer. We're at the start of our online journey and we have the opportunity to grow this important channel and also use it to get closer to our customers and provide more services to them. The platform is there for us to build on. Now, having said that, Card Factory's business model obviously meant it had a very difficult COVID, but it has shown its resilience throughout. And for the reasons I outlined on the previous slide, with the refinancing route clear, the world opening up, there is a clear path through to delivering both strategically and financially. There was pent up demand from customers now that we are open again. However, Customers are choosing to visit the high street less, but spend more, stocking up on the unbeatable value products that we have in store. Online demand has settled since the store's reopening, but it's settled at higher than pre-pandemic levels. We know most of our customers have had a difficult time through COVID, having not been able to celebrate over the last year as much as they would have liked. But we expect that this year, there'll be renewed enthusiasm to share and celebrate those special moments. There is a lot to go for, and I think we are well placed to win. Chris will now take you through the financial performance and business update for our year-ending January 21. Chris.

Just moving on to the financial performance of Card Factory for the year ended Jan 21. On the financial summary, overall the business was impacted by a closure period of circa five months, leading to a 36.9% reduction in revenue. If we look at the actual performance of stores year on year, where they were open and trading, and including online, the business actually was in a positive like for like of 0.1%. Card factory stores on their own were minus 2.4, while card factory online was positive 135%, whilst retail partnerships performed strongly at plus 83%. The loss before tax that we guided to in January has increased by 4.7 million. This is to do with additional stock provision, which I'll come back to. CapEx has been well controlled at £7.4 million against £14.6 in the prior year, as has net debt being controlled at £107 million as at the year end. Moving to the like-for-like sales performance, we've seen a similar pattern between post-lockdown 1 and post-lockdown 2. So post lockdown one, we've seen the like for like sales recover from minus 25% to plus 2% in October, whilst average basket value remained consistent round about plus 25%. Transactions also recovered from minus 43% to minus 20% over the same period. As I say, post-lockdown too, we've seen a similar pattern, but stronger sales at plus two, recovering even further to plus 18%. Some of this was due to the impact of the seasonal sales condensed into a shorter period. Average basket value remained strong at plus 29% and transactions were more positive, minus 27%, recovering to minus 17% over the same period. And Darcy later on the outlook will touch on the more recent trading performance. Turning to the divisional analysis, overall revenues were down 41% in terms of the stores. We've seen the number of stores, 15 unprofitable stores close, nine new openings during the period with a net six reduction within the year. We do anticipate there'll be a future store openings will reflect a gradual shift to retail parks with an increased focus on the existing estate and locations. Online performed strongly, plus 135% for Card Factory Online. whilst getting personal also was positive at plus 12% in the period. Traffic was up off the impact of the pandemic, but we have seen positive traffic as well, opening up post lockdowns one and two. The improved offering with the new digital platform that was launched in July has had its impact and the mobile app was also launched in January, which is performing well. Moving to partnerships, strong performance at £5.6 million against £3.1 million the prior year, plus 83%. Some of this was the annualisation of the ALDI and TRS contracts. However, both have performed strong within that period. Turning to margins, the costs of goods in the year, has been mainly impacted by an additional stock provision of 18.1 million. This reflects the introduction of handheld terminals, which is now giving us more granular SKU level data, where we can analyze product performance in a lot more detail. We've done a thorough reassessment of the group stock position and assessed what product lines will support the longer term five year strategy. So the impact of this, we do not expect to be a reoccurring position. Moving to store wages, as you can see, the overall percentage has been controlled with sales. The period did benefit from £27.5 million of CGRS support and store property costs were significantly down. £18.1 million of this did come through rates relief, but we are seeing rent reductions in recent renegotiations of leases. Moving to direct expenses, these were down 18.3 million on the prior year, slightly up in percentage terms because of the non-variable element of certain property costs, such as water rates and an element of the fixed electricity charges. We've introduced a new gate five, which has reduced the external storage cost to the business, which will show benefit through into 22. And in operating expenses, we've also seen a reduction in costs further as we've looked at some restructuring within the business. There will be further investment in IT infrastructure and online support, including the new platform. Whilst rents have been fully accrued on deferred payment terms in the year. Now moving to free cash flow, the business generated a very positive free cash flow within the year. Two main call-outs driving other variants around net working capital, plus 33.4 million. A large element of this was the deferral of VAT. A smaller element regarding a reduction in overall stock levels and an element which relates to improved payment terms with suppliers. The other call out I'll make is around lease liability payments at 22.1 million against 41 million in the prior year. This largely reflects the deferrals, which I'll come on to shortly in terms of rental payments. But overall, a very strong cash flow generation in the period of plus 36.1 million, only 11 million down on the prior year. Just breaking out the underlying cash flows and net debt, Net debt excluding lease liabilities was down at £107 million, down £35 million year on year. But there's a couple of key timing benefits in FY21 that I want to mention. VAT deferrals and agreements with HMRC equated to £19 million and property rent deferrals equated to £21 million, totaling £40 million in the period. Therefore, the underlying cash outflow in the period for FY21 was minus £4.6 million. And the £40 million we expect to unwind fully within the period of FY22. Moving on to CapEx, as I mentioned earlier, CapEx has been tightly controlled in the period at £7.4 million, down from £14.6 million in the prior year. However, during the period, we have still supported key projects of the ERP implementation, new supply chain technologies that will give us improved operational efficiency and some more limited investment in terms of the store estate. And we've continued to invest in new technologies, such as handheld terminals, which have given us improved insight into the stock of the business. We've continued with web platforms and mobile apps, an investment there, and an element in terms of the nine stores and some relocations, 1.2 million. When looking to the guidance for FY22 in terms of CAPEX, This will be a reduced level at 10 to 13 million. Again, still supporting the key group's long-term strategic objectives, including e-commerce platforms, boosting online fulfilment capacity and the SAP implementation. I'd just like to move now to the liquidity update. The business we announced on an RNS on the 21st of May about securing new debt facilities for the business. This replaces the 200 million RCF facility which was in place to September 23 with a new facility of 225 million. This new facility breaks down into £100 million of revolving credit facility, £75 million of term loan and £50 million of CL bills, all with a maturity to September 23 with the potential to extend to September 24. During the period there will be replacement covenants. To March 22 this will include a monthly test on total net debt, and a monthly test in terms of the last 12 months underlying EBITDA. After March 22, we then moved to more traditional covenant tests of interest cover and leverage. I'd just like to call out a couple of other key points to the terms of the agreement. Equity distribution is prohibited until the term loans and the CL bills are repaid in full. And there is a requirement for best efforts to raise 70 million net equity by July 22, or alternatively to prepay 70 million using funds from other subordinated sources. Other key points from the board's perspective is we have controlled tightly the capital investment over this period during the pandemic. The board intends to prioritise de-leveraging the business and the capital structure which will be conservative yet efficient. And in terms of the overall group's capital policy, this is under review as trading conditions become more clear. Turning to the FY22 guidance, the business has had two and a half months of further lockdown, and we are cautious about the outlook of any potential further closures over the remainder of the year. And given the uncertain economic backdrop, further financial guidance will be given once trading performance has stabilised and can be assessed. And we believe this will be the next update will be at the interims in September. At that point, I'd now like to pass back to Darcy to go through the outlook.

The strategy set out in July last year across the three pillars, as I've already said, is by and large the right one. There's been some early progress made in testing price changes and range reviews, and key strategic investments were prioritized. However, COVID has had a significant impact on the progress that might otherwise have been made in 2021, as decisions were rightly made to hold back certain investments to preserve cash. We're completing a review of the five-year strategy as discussed by finishing the COVID impact assessment. And we'll be able to talk more about this at the interim results in September, when we will also have a clearer view of trading trends and the medium-term impact of COVID on shopping behaviour. Thinking about current trading, obviously we were still in lockdown for Valentine's Day and Mother's Day this year, but we were pleased with our online performance. And now that stores have opened online, has settled down at above pre-pandemic levels. The recovery pattern after this latest reopening is similar to the previous two lockdowns. And although trading was initially better than expected, this is reflective of the pent-up demand. Our two-year like-for-like from April opening is minus 2.9% versus 2019. However, it's important to note that the 2019 figures include Easter when we were closed in 2021 and there is also some timing differences with Father's Day. It's too soon to tell how trends will develop, but at the moment we are seeing materially reduced footfall completely in line with the wider high street trends and customers are shopping at slightly different times and choosing to spend more when they're in store. But it's too soon to call how things will settle down. But for now, our main focus is to ensure that we have the right ranges and layouts in our store to maximize sales and to ensure that we deliver on the key seasons of Father's Day and Christmas and ensure that we have sufficient online capacity. Of course it's been a tough year, but it's an exciting time to join the business. You'll appreciate that it's only been 90 days since I joined the business, and there's been a lot to do with reopening and refinancing. As I said before, I'm very impressed with what I've seen so far. Customers have great affection for us. as a brand and for what we offer, but we can do a lot more to serve them better and to help them shop with us more conveniently. Our business model gives us a great deal of opportunity to do this better and more efficiently across different channels. Overall, I am confident in the long term and our ability to unlock potential. For now, I'd just like to say thank you for listening and Chris and I would be delighted to take any questions that you may have.