Card Factory plc

Welcome to our Interims Results Update for FY22. I'm Darcy, CEO of Card Factory, and joining me today is Chris Lee, our Chief Financial Officer. Chris and I will shortly provide the financial performance update for the half one of FY22. Then, as we stated in our prelims, we will provide an update on our future growth strategy, which has been the subject to review over the last few months since I joined the business. Looking first at the financial performance for the first half of FY22, we are pleased with how the business has performed. With sales of $116.9 million, card factories achieved a like-for-like revenues of minus 3.7%, that's split by stores at minus 72%, and online at plus 50.2%. This has led to a $6.5 million loss before tax. We've continued our strong focus on cash, and our net debt is now below $100 million. Store transaction levels continue to outperform the springboard high street footfall data, demonstrating the strength of the brand and the customer proposition. And in addition, increased average basket value across multiple categories is offsetting the reduction in transaction volumes. So what's important to note? Unlike other retailers, if you missed a birthday party because of lockdown, that event will not be repeated. However, if, for example, we look at the wedding category, what we are seeing is that as restrictions have lifted, we see volumes rebound. Similarly, with children's birthday parties, as schools return, assuming no further restrictions like wedding, we would expect to see that category bounce back. Looking at online, that channel is performing well and will continue with our planned investment to drive future growth. Online is one of the growth areas examined through the strategy review, which I will talk through in more detail later. The transition is underway to becoming an omnichannel retailer, allowing customers to shop whenever and however they want. The strategy will show an increased focus on complementary gifting and party categories to enhance the offer and substantially increase the addressable market. And importantly, we will shift the focus of Card Factory from being a product-led to a customer-led business. Chris will now take you through the financial performance.

I'd just like to give you the financial performance for the first half of FY22 for Cardfactory. So just turning to the financial summary, overall sales were £116.9 million against £100.5 last year. Overall there was 60% of the year where the stores were allowed to trade this year against 48% in the prior year. That in terms of like for likes on a two-year basis against pre-pandemic levels was minus 7.2. Online and multi-channel was plus 50.2 with a net card factory like for like revenue of minus 3.7 delivering a loss before tax of 6.5 million which was an improvement on the loss of 22.2 million in the prior year. Net debt has been well controlled at 96.5 million down from the 143.9 in the prior year. And including the lease liabilities, that is £238.9 million. Just moving to a little bit more detail around the like-for-like sales performance in terms of how card factors outperform footfall trends in terms of what we've seen in terms of springboard data. I'll turn straight to the graph on the right hand side, which effectively shows in the top line where the average basket value within our stores has been since reopening in April. As you can see, the ABV was put over 30% up at the start. And in terms of transactions, the bottom line, the green line, were negative 30%. The middle line, the yellow one, is effectively the like-for-like two-year sales performance. And as you can see on the line, there's been a steady underlying recovery in transactions and therefore in terms of the like-for-like performance in that period. So just turn into the divisional analysis for Card Factory. Overall, in terms of store revenues, those were 102.7 million. Again, reflecting that 10 plus weeks at the beginning part of the year, we were in lockdown. Overall, the store transaction levels are still pre-pandemic levels. However, we have seen that strong recovery and demonstrating the strength of the Card Factory brand. We continue to review the estate of just over a thousand stores and to make sure they're in the right locations to maximise the sales and we increased the net store estate by three during the period. It's fair to say we're seeing in terms of retail parks much stronger performances in terms of the footfall and like for like sales. Moving to the online performance, even though year on year the online grew by 4.8%, we should bear in mind that actually the close down period in FY22 in terms of the stores was lower and therefore that is a pretty strong performance. Getting personal was down 20.7% but this was an internal decision within the business to go after more profitable sales and we're certainly seeing that within the bottom line where on pay-per-click transactions we're back in where we can see there's return on investment of them keywords. And in terms of partnerships, we've seen strong year-on-year growth at plus 17.8%, up to 2.3 million. Total retail locations have increased as well from 894 to 908. We've seen strong performance from Aldi and we've also agreed a contract renewal with them. The Reject Shop and Matalando were impacted by COVID restrictions in the period. I'd just like to turn to the margins of the business during the period. Overall, the costs of goods in the year were pretty much in line with the prior year in margin percentage terms and a slight improvement of 0.8 percentage points being driven by how we've managed to utilise a lot of the aged seasonal stock from prior seasons into the new year. Also store wages, even though store wages are up at £30 million against £23.7 million. This reflects really just the time in terms of less utilisation of the CGRS scheme. And store property costs down at £4.5 million from £6.9 million. Again, this relates mainly to the timing in terms of government support in terms of business rates. And then turning to direct expenses and operating expenses, you can see that year on year we've managed to keep them costs flat or slightly down. The only other point bridging down to the operating loss of 6.5 million is the net financing expenses that are slightly up at 6.5 million, reflecting the blended average of the financing that's in place now of just sub 5%. One other important call-out on the sheet is the other income, a one-off income of £8 million in the P&L. This reflects the government grants that's been received in terms of government support and non-essential retail closures. Just turning to the free cash flow, we've seen a continued improvement in the cash generation of the business and largely driven by the improvement in sales and the profit performance overall. Two further call-outs in terms of the cash flow is one on the networking capital, where we've seen that 4.7 million negative. This is purely down to the deferrals that we managed to negotiate with landlords on rents and with HMRC in terms of VAT. Further down the cash flow you'll see lease liabilities that again it's £1.7 million negative. This again is being driven by just the timing and deferral of payments on rent into the current year. So overall a very positive free cash flow plus £14.5 million against £1.1 million last year. One further important point on the free cash flow is the note at the bottom. You might remember at the year end, I mentioned that there was 21 million of rent deferrals that we negotiated and there was a further 19 million of VAT payment deferrals also. As we sit here at the half year, we've now got 26 million of rent deferrals as we've had further lockdown periods and we've negotiated further rent deferrals there and the VAT liability deferrals are now 7 million. I expect by the year end that into FY23 most of the payments will have unwound in 22, but by 23 there could be between 6 and 12 million of them deferral payments hitting that year's cash flow. So I'd just like to move to the liquidity update. You'll remember in May of this year we gave an announcement in terms of the securing of 225 million. of financing facilities for the business. This was with replacement covenants until March 2022. Other important terms that were mentioned in the agreement in May was that we have the requirement to either raise 70 million net equity by July 2022, or to prepay 70 million using funding from other subordinated sources. It's fair to say as a business, the capital investment has been tightly controlled to preserve cash whilst at the same time investing in the long-term strategic objectives. The focus is on maintaining a capital structure that is conservative yet efficient in providing long-term returns to shareholders. And the group's capital policy continues to be under review as trading conditions become clearer and as we see the transactions on the high street recover. I'll now pass back across to Darcy to give an update on the refresh strategy.

As previously stated, I would like to use today to provide an update on our future growth strategy. We've undertaken a review of the five-year strategy, which was originally announced at the Capital Markets Day last July. We needed to understand the impact of COVID on the strategy, but I also wanted to ensure that it could deliver the growth that shareholders expect and contained enough ambition to seize the opportunities that exist both within the markets we serve and the markets we could exploit to create maximum shareholder value. Working at pace, we have stress tested and evolved the strategy. And for reasons I will explain, there's still more work to be done in some areas. However, what we have is a strategic approach that will build on our market leading proposition in cards while positioning the business to access broader market opportunity. So let me start by clearly outlining our vision for CardFactory, where we will be by the end of FY26, and when we've delivered on our opening, our new future strategy. Over the next five years, we will transform Card Factory into the first omnichannel brand in our space to help customers celebrate each and every special occasion. We will become the number one UK destination for all customers seeking unrivalled quality, value, choice, convenience and experience. and we will broaden our international footprint, putting more cards and gifts in the hands of more customers around the world. Delivery of the strategy is expected to drive an acceleration in revenue growth and margin expansion, growing revenues to over 600 million pounds by FY26, with approximately 20% generated from online and multichannel and retail partnerships. while creating a business with a low cost base and a highly scalable business model. We expect the delivery of the strategy to result in a shift in product and channel mix alongside investment resulting in PBT margin trending towards 17% over the long term. By building on our existing quality and value heritage, we will take CardFactory on a journey that provides our customers with more convenience by providing greater access to our products wherever they are and wherever they want them. More choice by building upon our leading card offer to expand into complementary ranges and an exceptional customer experience that makes Card Factory a destination brand for more customers. If we want to make best use of our nationwide store estate and respond to today's customer needs, then we need to transform the business from a predominantly store-driven retail model to a full omnichannel offer that uses existing and invested infrastructure to become the first card and gifting retailer to provide a seamless physical and online customer experience. This will provide access to all categories, anytime, anywhere, including our personalized products by app or website at home or on the move. We believe that Omnichannel provides the opportunity to leverage our brand, store estate, vertical integration, quality and value proposition, as well as our investment in our online channels to materially increase our market share of the online market. The UK online market for cards was estimated to be worth $550 million in 2020. That's up from $177 million in 2019. We are therefore targeting circa 10% of group revenues from online by FY26, up from 2% today. The budgeted omni-channel capital expenditure will include near-term investment with areas of note including enabling our customers to access our brand and offer at home, on the move via our apps and in-store through web access. This will allow our customers to access our extended range in-store and will test options to understand appetite and investment return. increasing the range of shipping options to home or store that meets every budget, increasing our fulfillment capacity, accuracy, and speed to deliver against our customer service promise, and enabling customers who want to self-serve throughout the journey to be supported by an AI experience focused on recommendations, personalization, notifications, and live chat. The store portfolio will be optimised to ensure Cardfactory has profitable stores in high footfall locations, with 100 new stores added to our existing portfolio of 1,000 stores across the UK and Republic of Ireland by FY26. These new store openings will be focused on under-penetrated areas including London and areas of high footfall including retail parks. The store optimization program will continue with locations selected based on profitability and returns. And our stores will remain a vital route to market and are not simply legacy assets. Store revenues will continue to grow in their own right, but will simply be a smaller proportion of the mix as our online growth accelerates. Initiatives such as targeted pricing and an increased gifting range are expected to improve in-store sales, increase average basket value, and offset the structural trend of minor year-on-year footfall decline. As part of our omnichannel transformation and through continued platform investment, we expect to increase our share of the online market from 2% to 10%. Our new business development director, Syed Kazmi, joined in late August, and over the coming months, we will have designed and started delivery of our new partnership strategy. This will allow CardFactory to reach more UK customers for modest investment in additional convenient locations that meets the growing demand for impulse buying. Internationally, we will use the group's expertise, including card design and customer insight, to expand into new territories through partnerships into markets that show attractive characteristics for entry and disruption. While continuing to be a card-led retailer in a stable market where 76% of adults are card givers, we will meet customer demand by providing greater choice through complimentary gifting and party ranges, opening up access to a large market worth 40 billion per annum in the UK, capturing more customer spend and increasing average basket value. We are already leaders in party and balloon categories. And for stores, we will be looking at expanding into additional categories such as stationery and confectionery with other categories also being explored. This will not come at the expense of cards in store. It's about making smarter, more agile choices about the space dedicated to complimentary categories. The card range will be broadened in terms of introducing more modern and contemporary choice and a clear focus on the proposition in store to help shoppers. However, we expect the SKU size will remain the same. Online will have a far broader offer more across complementary categories. And at all times, our vertically integrated business model will remain a unique point of difference, affording us the flexibility to respond to market changes and enabling efficient, high quality production at attractive margins, supporting online growth with lower costs per unit. Providing a new omnichannel service, Card Factory will improve the customer experience and access to its offer by being the first card and gifting brand to bridge digital with its store estate. This will be supported by an improved customer understanding from new data capabilities, including through the rollout of the group's new RP platform in Q4 this year. This will allow us to understand and respond to changing customer habits and preferences, including insight on price elasticity, enabling us to evolve our pricing approach while maintaining high levels of customer satisfaction. We will continue to invest in our brand based around quality and value to increase customer awareness and improve trust. Lastly, we will develop our ESG strategy to be recognized as a socially and environmentally responsible business, building on the wide range of existing initiatives that we already have in place. These include the recently introduced foil balloon recycling that is available to any customer visiting our store. We also are proud to have increased our store recycling to 87% of all store waste. And we will be a positive contributor in the communities we are present in. And we continue to be proud of our association with Macmillan Cancer Support, for which we have raised 7 million since the start of our relationship. So in summary, Our opening our new future strategy is built upon using our market position, customer loyalty and vertically integrated model to provide a platform for our new omnichannel strategy. Expanding into the gifting segment which is highly complementary to the card giving market where we are market leaders and which is highly resilient. Our refreshed growth strategy will deliver sustainable revenue and profit growth and we will be making further investments and development across channels to improve convenience, choice and experience for customers. Now, with the Christmas season upon us, I want to provide an update on our preparations. We are well positioned with stock intake brought forward and car factories in-house printing capabilities covering 70% of the range. We've brought forward recruitment to mid-September, supporting the challenging market we face, and system changes mean we can provide a smooth and speedy onboarding process to retain successful Christmas candidates. Almost all Christmas and everyday ranges will move to auto replenishment. This will ensure the right stock is in the right stores and we free up colleague time to focus on customer service. Our product ranges have been planned and built around three new key design trends this year, including our character of the year, the Yeti, which is an amazing character and I'd encourage you all to go out and buy it. This is supported by lots of great value for money offers throughout the entire store, including cards from 29P, fabulous gifting ranges from soft toys to monogram gifts to festive books, and even amazing chocolate character decorations for the tree, all for only one pound. Across our single Christmas card range, we've worked hard to significantly reduce the amount of glitter used throughout the range. In addition, we're pleased to have been able to remove all plastic from our box card range, saving the equivalent of six and a half million plastic bottles. So in summary, Cardfactory is now well positioned for growth, targeting over 600 million of sales by FY26. We will open 100 net new stores, adding to the existing portfolio of over 1,000 stores across the United Kingdom and the Republic of Ireland by FY26. We will transition towards 20% of sales expected to come from online and omnichannel and retail partnerships by FY26. Our PBT margin will trend towards 17% in the longer term, reflecting shift in product and channel mix. And we will have completed our transformation to a full omnichannel offer. Thank you for your time today. We now look forward to answering any questions that you may have.