Card Factory plc

Welcome to our preliminary results update for FY22. I'm Darcy Wilson-Reimer, CEO of Carfactory and joining me today is Chris Lee, our CFO. Chris and I will shortly provide the financial performance update for FY22 and I'll then provide an update on delivery progress for our opening our new future growth strategy and then the outlook for the year ahead. Let me begin by saying that having now completed my first full year as Chief Executive of Card Factory, I've been impressed by the potential from the design, print, manufacturing and retail capability, as well as the culture of the business, and I'm optimistic about our opportunities for growth. Card Factory is a company that is loved both by customers and colleagues, and there's an energy from our colleagues to do the right thing, which was reflected in our FY22 performance. Reflecting on FY22, there were a number of operational priorities that we addressed. As lockdown ended, we ensured the stores reopened and traded as strongly as possible. We actively responded to supply chain pressures to mitigate trading disruption, and the fact that we have our own in-house design, print and manufacturing capability proved its worth through FY22. We reviewed and updated our opening, our new future growth strategy. We successfully completed phase one of our ERP implementation and our leadership team capability has been strengthened with new talent and we accelerated the evolution of our culture within CardFactory. And finally, as you see within our results, we ensured we had the right financial structure in place. All of this was reflected in our FY22 performance, which saw sales recovering steadily after lockdown. This enabled an improving top line performance of $364.4 million for the 12 months to the 31st of January 2022 or our financial year 22, which was a 28% increase year on year driven by growth in store sales. The steady recovery of store performance of plus 33% year on year reflected a 20% increase in the number of trading days compared to the prior year and a recovery in our market share. Online sales were ahead of pre-pandemic levels at plus 23%, reflecting the expansion of our product range online and improved customer experience, as well as an accelerated shift in consumer behavior. Profits were ahead of management expectations despite significant inflationary and supply chain headwinds, with a PBT of $11.1 million versus guidance of $7 to $10 million. The business remains highly cash generative with significant reduction in leverage during the year. The focus on building the financial strength of the business was seen through the strong operating cash flow, which was up 42% versus the prior year to $114 million, excluding lease liabilities. We ended the year with improved balance sheet strength with closing net debt excluding lease liabilities of 74.2 million compared to 107.7 million in FY21. Finally, we're pleased to have successfully refinanced the business with our banking partners as announced on the 21st of April 2022 and the revised agreement removed the obligation on the group to use best efforts to raise further equity to make prepayments of the debt facilities. So to discuss the refinancing and full details of our financial performance I'll now hand over to Chris.

Thank you Darcy. I'll now give you the update on the financials for FY22 for Card Factory. So the revenue overall grew by £80 million during the period as we've seen a steady recovery in store performance following the easing of lockdown restrictions. Storrs LFL was minus 5.7% against FY20, while online light flight revenues for Cardfactory were minus 1.5% with a combined position for Cardfactory of minus 3.9%. The profit before tax for the period was £11.1 million. This is ahead of the £7-10 million guidance that we did give in January. And net debt has come down considerably, excluding lease liabilities, to £74.2 million. This is nearly half where we were in January 2020, pre-pandemic. And net debt, including lease liabilities, is £193.7 million. So just moving to the like-for-like sales performance. We've still seen on the high street that footfall is subdued. So in the period we've seen transactions reflect that in terms of minus 23%. And average basket values have remained strong at plus 22% during the period since reopening in April 21. Card Factory Online at minus 1.5% was against a tough comparative of 135%. Bearing in mind that FY21 had five months of lockdown period where people went online to shop. Moving to the divisional analysis, revenue overall in the stores was 33% up on FY21. We've got a consolidation evolution of the store portfolio in line with changing shopping habits. We've added a net four stores to the portfolio to 1,020. Even post-pandemic, we're now seeing only circa 2% of stores are marginally loss making. As part of our monthly review in the property reviews, we do address these in terms of a plan of action and relocations. Trading has recovered particularly strong through the year, especially into December where we've seen light for lights on December 21 against 19 get to minus 1.4%. We've also introduced the first new model store in Coventry featuring improved customer flow, store navigation and operational efficiencies. And we plan to open a number of more of these stores as trials during the financial year. I think the store performance reflects the strength of the Card Factory brand and underlines the importance of stores as part of the wider omnichannel strategy. Moving to online, I've touched on the minus 1.5%. The key areas where we've seen strong performance in Card Factory is around non-personalised cards as well as gifting, parties and balloons as people have shopped online and reintroduced parties. The other area in terms of getting personal was a bit more subdued at minus 21%. This really reflects a couple of things. One which is around what we positioned previously about backing profitable sales and pay-per-click transactions which have a decent return on investment. And then there's an element where we're transitioning getting personal onto the new platform which is expected in late H1 in FY23. Just in terms of partnerships, partnerships 4.6 million were down on the previous year, but in line with expectations. So the reduction is mainly due to the reject shop and basically the lockdown periods that we're seeing in Australia. And we've seen Aldi maintain year-on-year flat sales and bearing in mind the five months of lockdown in FY21, where people were shopping more in essential retailers while non-essential retailers were closed. So we've seen a robust performance in partnerships. And we've now got a new business development director who is leading that strategy. Looking at the margins of the business over the period, the product margins were strong in the period at plus 4.4 percentage points. 0.4 of this was around currency gains in terms of the FX blended position. And then 4% has come from the realignment of stock provisions alongside the improved stock management. Store wages increases aligned with where we expected with national living wage and some of the offsets in productivity gains. While property costs increase reflects effectively the fact that there has been less rates relief from the government in FY22. while direct expenses have increased in line with the increase in sales and operating expenses reflecting the investment that we've made in the IT infrastructure and an element in the prior year benefiting from CGRS in terms of government support in lockdown periods. But overall that means the EBITDA for the period was £85.6 million against £45.8 million, overall nearly double the profit of where we were last year. And in addition to that, if we look at the depreciation line now, you've got the right of use of assets, the rent charge goes through that line. That has also reduced down to £37.3 million against £39.6 million in the previous period. Net financing expenses were higher than the previous year. This reflects the refinancing that we did in May 21. And it also reflects the refinancing options that we explored before the refinances that we announced on the 21st of April this year. But overall profit 11.1 million profit for tax against the 16.4 million loss in the prior year. Importantly, looking at cash flow. So the benefit of the increased profit, but one of the key call-outs I want to make is net working capital. Net working capital over two years, we've managed to improve that by 62 million, which obviously has benefited in terms of reducing net debt position of the business. Other lines you'll see on the capex, 6.6 million, 7 million last year, this reflects the control of cash and capex that we made during the Covid impacted periods to preserve cash and lease liabilities you'll see at £54.8 million against £22.1 million that reflects £19 million of deferred rents from FY21 into 22. So when looking at free cash flow, free cash flow was more positive than FY21 at 42.5 million against 36.1. And underlyingly, we've took an additional hit in the year of 90 million of rents. So the underlying position would be nearer 61.5 million. So this is the reason we've seen net debt tumble by the year end. In terms of the liquidity update, four key points really. We've delivered the refinancing. This draws a line under the liquidity concerns and gives us sufficient headroom. We've also removed the obligation for any equity raise and we've got a new financing facility through to September 25 to support the five-year strategy. Obviously there's been a lot of talk about inflation and headwinds so we expect in FY23 that revenues will recover towards the FY20 pre-pandemic levels. and as previously guided, expectation is for significant inflationary headwinds to continue through FY23. The key areas for Cardfactory are around freight costs, fuel, national living wage and energy. We have taken pre-emptive action on these areas and mitigated a significant proportion of them, with a combination of efficient management of costs and working capital, as well as targeted price increases. So the expectation in FY23 on revenue and profit remains unchanged. And FY23, one additional point on capex, we do expect to spend circa 23 million in this financial year. This reflects the areas for delivery of the strategy and the areas where we preserve cash, as I mentioned, in the cash flow of the last couple of years. The key areas are the ERP Phase 2 implementation, the development of online, that includes increasing our fulfilment capacity and efficiency, as well as the wider omnichannel offering and investment in stores. We're still going to invest In existing stores and new stores, circa 7 million, with a gross number of stores of around 50 and a net number of stores around 38, as we do look to do more relocations in the existing portfolio. And then just looking at an update on the current trading. So I think what we've seen in the first few months of the current financial year is that it's in line with our expectations. and has continued to recover our market share position, which is obviously key. But we are seeing a mixed shift in our spring seasons, Valentine's Day, Mother's Day, towards everyday ranges, which typically represents, our everyday represents 70% of our annual sales. We believe that shift may be more towards 73%. However, bearing in mind that Mother's Day and Valentine's Day is significantly less than 10% of the overall sales. for the year. So overall, the performance through the balance of the year will increasingly benefit from the planned strategic improvements, including expansion of our market share in complementary categories, rollout of trial store and targeted price increases. There's three key initiative areas. Pricing increases, authority in complementary categories so these include soft toys we've introduced books we've introduced confectionery and chocolates the third one is leadership and card choice key areas refreshing the ranges and new price points so particularly around wedding female and open we'll be looking to refresh those ranges that's the conclusion of the financial update and i'd like to pass back to darcy for the strategy update

Thank you, Chris. This will be the first strategy update since our revised opening our new future growth strategy was announced in September. I appreciate that not all of you could attend that update, so I'm going to begin with just a brief recap. I'll then go into more detail about key milestones we've delivered and our priorities over the coming months. So in summary, it is clear that the right way forward is to transition Card Factory from being a store-led card retailer into a market-leading omnichannel retailer of cards and gifts. Through this strategy, Card Factory is well positioned to become the UK's number one destination for all customers seeking unrivalled quality, value, choice, convenience and experience. We're working to transform Card Factory into a leading omnichannel brand in our space to help customers celebrate each and every special occasion. And it's our aim to become a global competitor, putting cards and gifts in the hands of more customers. As outlined at the time of our interim results in September, we will be building on our existing quality and value heritage to take Card Factory on a journey that provides our customers with more convenience by providing greater access to products wherever and whenever they want them. This will come through an improved digital experience and the transition to a full omnichannel business. The expansion of our UK and Republic of Ireland store footprint, as well as growing international presence in countries which are primed for disruption due to identified gaps in the market for Card Factory's value and quality proposition. More choice by building upon our leading card offer to expand into complementary ranges. We'll continue to be a card-led value retailer in a stable market where 73% of UK adults are card givers. However, we will meet customer demand by providing greater choice through complementary gifting and party ranges, opening up an access to a large market with 44 billion per annum in the UK, which will be targeting 5 billion which is between four and five times larger than the card-only market that CardFactory has previously focused on. Lastly, we'll be delivering on an exceptional customer experience through improved data capabilities for understanding the customer, brand investment and ESG investment. will develop a culture of accountability with colleagues empowered to make the right decisions for the business with a shared understanding of its identity, strategy, vision and values with a diverse, inclusive and socially responsible business. Delivery of our strategy is now underway and some significant milestones have already been achieved. We've strengthened our leadership team with appointments into key roles of Chief Information Officer and Digital Director, recognising the critical role digital has to play in our business growth, as well as a new Business Development Director to lead our partnership strategy. In addition, we have also appointed Card Factory's first Customer Marketing Director to oversee our new customer marketing function. These appointments bring significant experience to our leadership team and will ensure that we have the right capabilities to drive the next stage of our growth. Regards our strategy delivery milestones, these include opening our first new format model store in February 2022. The Coventry store features better use of store space, improved customer flow and navigation through the store, whilst also improving operational efficiencies. Results from the store have been very promising and we're confident that similar results can be achieved as more trial stores are opened. Transitioning both online platforms cardfactory.co.uk and getting personal.co.uk onto a single unified platform, unlocking cost benefits and opportunity to significantly expand the cardfactory.co.uk gifting range. Looking ahead, our focus for the next financial year is creating growth opportunities around the store estate and building out our wider capability. Key milestones include building upon our existing leadership in party and balloon categories to expand our market share in our stores within complementary categories such as stationery and confectionery. This will not come at the expense of cards in store. It's about making smarter, more agile choices about the space dedicated to complementary categories. Completing the rollout of trial model stores so that we can prepare for a wider rollout from FY24 while taking valuable learnings into the existing store estate as we get them. And for new store openings, we've identified a profitable route for opening our first stores in central London. In addition, having enjoyed profitable success with our first 14 stores in the Republic of Ireland, we will continue our expansion plans with a further five stores already identified and additional openings planned. More broadly, in terms of the wider capabilities we need to put in place to deliver on our strategy, we will trial the ability for shoppers to click and collect any product from our online or app platforms for collection in store. And this is the first step on rolling out our omnichannel capability, which we believe provides the opportunity to leverage our brand, our store estate, our vertical integration, and our quality and value proposition, and our investment in our online channels to materially increase our share of the online market. We will deliver the second phase of our ERP. Already live across the finance function, the new ERP system will underpin the growth strategy across the entire business, allowing us to understand and respond rapidly to change in shopper habits and preferences. It will provide the ability to view stock in all areas of the business, which is essential for omnichannel operations. It will also allow us to integrate with future partners, both in the UK and internationally. Finally, to support maintaining margins, we have begun a highly targeted set of price increases across some of our products, which follows on from the success we achieved last year. We are carefully analysing the impact on sales and further price rises on other SKUs are being actively considered. But we're going to do this all whilst maintaining our value proposition. Regarding our ESG focus, we are committed to growing our business in a socially and environmentally responsible way. We're making considerable headway in meeting these objectives. Highlights include being on track to reduce waste, with 90% of our products being free of single-use plastic, and all of our products being glitter-free by the end of FY24. We're progressing well in terms of reducing our carbon footprint and we have an ambition to become a carbon neutral business. From a social perspective, we launched our diversity, equality and inclusion strategy, which is making a positive difference for colleagues, for the communities we work within, the products we sell and the suppliers we work with. Our approach to career progression and talent management is progressive for all colleagues. and we continue to have a positive impact within the communities we work within and the charities we support through our car factory foundation, all of which is underpinned by a rigorous approach to good governance. So in summary, as we look ahead, we are focused on building out our digital proposition and leveraging our store estate and brand heritage to transform CardFactory into an omnichannel business, allowing our customers to access our product anywhere and anytime they choose. We will continue to build on our success in complementary categories to address a 5 billion gifting market. At the same time, we're also expanding our successful partnership model, both in the UK and internationally. all of which will continue to be built upon the strength of our vertically integrated model, which is a unique point of difference for Card Factory, allowing us to own every aspect of design, manufacture, distribution and sales channels, both in-store and online. We'll continue to build the financial strength of the business, which is highly profitable and has strong cash generation and is now underpinned by the successful refinancing. This means Card Factory and FY23 will expect revenues will head towards pre-pandemic levels, and our expectations for FY23 revenue and profit are unchanged. We've taken preemptive action to help mitigate the inflationary pressures we are seeing across the business, and we will continue to monitor and respond to developing macro environmental pressures. Card Factory is now well positioned for longer term growth, targeting over 600 million of sales by FY26. Delivery of this growth ambition is well underway and will make significant headway in the delivery of our opening our new future strategy this year. We are therefore excited by the growth opportunity ahead and we continue to focus on implementing changes to enable delivery on our transition from a store-led card retailer to a market leading omnichannel retailer of cards and gifts. So thank you for your engagement and your time today. Chris and I will now be happy to take any questions that you may have.

And we'll now take our first question from Kate Calvert from Investec. Please go ahead.

Morning, everyone. Just two for me. First on the supply chain, given your exposure to China and obviously the continuing sort of COVID restrictions, disruptions over there, what are you doing differently this year to ensure consistency of supply, particularly in the run-up to COVID? And my second question is on your product margin percentage. It's still quite a bit below where peak levels were pre-COVID. Sort of where do you see that getting back to over the next three years?

Thanks, Kate. Yeah, so, I mean, in terms of China, as you say, there is some exposure to China, so we have been monitoring that quite carefully. The bit we've looked at generally is Kieran Stonewall- You know, in terms of assessing risk of the businesses, where we can source all the products from so within Europe and other areas. Kieran Stonewall- I think, at the minute, in terms of the amount of product we've sourced already in terms of the seasons and Christmas in particular that we remain pretty comfortable with that and. Kieran Stonewall- In terms of product margin, we made a note in the statement around. we did provide for stock at the back end of last year, and because of some freight issues that have been widely noted in the press, we ended up where we substituted some products. So there was a little bit of a tailwind of that provision, but I think if we're looking at the 4% we guided to in the in the note for four percentage points difference, there's probably about two of that, which is in relation to a tailwind in the period. So I think product margins will remain, like I say, 2% different, but thereabouts, I don't think that the pre sort of product margins that we'd seen back to those levels on the basis, we've introduced a lot of other categories. We've mentioned about confectionery, John Wilkinson, chocolates and other products in the non non card area, these are the things which are actually you're driving and good cash sales, so that the margin like I say I expect to be about 2% different to the the current position of the year end.

Thank you, Sergey. We've had a number of questions come in from the webcast. Just a reminder for those who wish to ask a question on the webcast, please click on the submit question button in the control panel at the bottom of your screen. Our first question is from Adam Tomlinson from Liberum. Can you please talk about current stock position and availability levels? How comfortable are you and where does inventory need to be?

So in terms of current stock levels, we've obviously made some investments in Hanel terminals and basically getting line levels, SKU levels, stock details in stores. So we've got a lot more, a much better handle on the stock and availability. Off the back of that, we have managed to successfully bring stock levels down. So I think we remain comfortable at the reduced stock levels that we've seen at the end of FY22.

And please, can you give details on the capex set up in FY23?

We've not given a breakdown on the 23 million guidance, but effectively the key areas really around the ERP phase two, which is the core stock system. which will give us the full stock loop, which will improve our visibility on stock further. Also online investment, so around online fulfilment, so actually the capacity and ability to fulfil orders better, as well as investment in omnichannel and online. And then, as I said, we're still looking, that will be circa 7 million, which will go into stores around 50 growth stores, 38 net, and also relocations within there. Other areas we'll continue to invest in is the vertical integration and the important, obviously competitive difference we've got there. So there'll be an element in there. And some of this really is where we've controlled cash in the previous two years on CapEx. Some of the investment that was always part of the five-year plan.

And can you give a bit more colour on where the major investment's going?

As I say, it's split between them categories, really. Yeah, like I said, we've not given any more detail than that.

Thank you. His next question is, when you talk about price rises, can you help quantify what you have in mind and what you've seen the competition do so far?

So on price rises, obviously, we've done a number of tests in the market prior to making these changes to see the impact on volumes. So where we've looked at these certain key price points, examples would be 59 to 69p, we moved 89 to 99p, some 149 cards to 99p. The key point is that we're not just doing that just on a change of the tab on the existing card. We are looking to re-engineer the cards and put more value into the card. And obviously then there is on the non-card areas where we've introduced other categories, books, confectionery, chocolates, at different price points as well.

So, Christopher, I'm just going to add on the... price thing i think it's important so first of all back in september i said that we would look to offset price through offset inflation through a combination of productivity and price which is our strategy and we're doing the other point of price that's important is is maintaining the architecture and so whilst we've as chris has said moved some of the pricing uh up to 89 to 99p for example what we look to do is maintain logical price architecture. So we haven't changed our entry price point to 29 pence, but we have brought in higher price cards. So our exit price point in some categories is higher. So if you take wedding, for example, We've now put in a card that has more to it, so it's more value, as Chris outlined, but with an exit price point of $2.99, for example. So in addition, it's about maintaining appropriate architecture and also looking at how we can drive spending.

Thank you. Adam's last question is, you talk about having already mitigated a significant portion of inflationary headwinds so far. Can you please give some further details?

So obviously one of the key areas has been freight. I suppose we'll look at the main inflationary areas as being freight. Obviously, national living wage continues what we've seen on fuel prices. The freight piece in particular, one thing we looked up in a lot of detail is container fill. So obviously maximising containers and the time of when them containers are shipped makes an impact on the pricing. And obviously, in terms of installs, we've looked at more efficiencies, more where we can use investment in IT and technology to take tasks out of store to combat national living wage. We've hedged sort of three years out in the pre what's happened on energy prices in that area. And on fuel, we've been in negotiations with a number of carriers in terms of from DC into stores. And those contracts in terms of, you know, not taking the full impact of the fuel inflation through those negotiations. There's been a lot of other measures, but they're probably some of the big ticket things.

Thank you. We've had a number of questions come through from James Gilbert from Argonne Capital. Firstly, please can you walk us through the build-up of your projected revenue growth in the medium term from each of your initiatives? How much from store openings, range market expansion, online, et cetera? And can you give us guidance on medium term operating margin targets in this context, please?

So in terms of the build-up to the projected revenue in the medium term, obviously we've not given that break down in the market. In terms of the overall split of where we target to get to in the next five years up to FY26 is for 20% of the sales to be through online and partnerships. And in terms of the margins, we guided previously in terms of the margins of where we were targeting in the future to get to circa 17%. And those, those guidances remain intact, but clearly with inflation, where it is, those things will remain under review.

We have no further questions. So I'd like to hand back to our speakers for any additional or closing remarks.

Just taking opportunities to thank everybody for their time and attention today and look forward to catching up with our shareholders in in due course.