Card Factory plc

Welcome to the CardFactory FY27 interim results presentation. Please welcome to the stage CEO Darcy Willson-Rymer.

Good morning. and welcome to our interim results presentation for FY27. Thank you for joining us today whether you're here in person at UBS or online. I also know that we have many Cardfactory colleagues joining us today so a warm welcome to you and thank you as always for everything you do. I'm Darcy Willson-Rymer, CEO of Cardfactory and Matthias Seeger joins me here as our CFO. and I'll start with an overview of the first half before handing over to Matthias to take you through our financial performance in more detail. I'll then return to provide an update on the strategic and operational progress we've made before covering our priorities for the second half and our outlook for the full year. Matthias and I will then take your questions at the end. So the first half has seen further progress for Card Factory despite continued and well documented pressure on UK consumer sentiment. We are on a journey of transitioning from a specialist card led retailer into a leading celebrations business underpinned by an established profitable store estate. Everything we are doing is putting in place the foundations to capture this. We've remained focused on strengthening the store business. We'll continue to capture a greater share of the celebration occasions market and making progress unlocking our growth opportunities. And as we enter the important second half, we have stronger plans in place for the golden quarter informed by the learnings from Christmas and Halloween last year. So starting with our performance in the first half, group revenue increased by 5.3% with positive free cash generation across the group. And while continued pressure on UK consumer sentiment impacted footfall and like for like sales, improved product margins supported increased UK store profitability and we delivered positive free cash flow. Alongside this, the work delivered in the first half has strengthened the foundations for future growth. we enabled the rollout of our new party proposition expanding our participation in the broader celebrations market and as stated at prelims we've progressed our strategically important store segmentation program and in addition we continued with our program of targeted new store openings as well as further operational improvements that support a more productive estate Progress with partnerships and international wholesale has continued alongside the integration of Funky Pigeon. and importantly, we enter the golden quarter with stronger plans in place. These include significant product newness and a broader, more joined up Christmas offer across cards, gift, wrap and party, supported by clearer value and stronger in-store execution, giving us greater opportunity to capture more of our customers' Christmas celebration spend. With the half one initiative such as party proposition and store segmentation delivering encouraging early results and alongside our golden quarter plans, we are confident of delivering our full year expectations. So for more detail on our financial performance, let me hand you over to Matthias.

Thank you, Darcy, and good morning, everyone. I take you now through our financial performance for the first half. These are the key messages I would like you to take away. First, group revenue increased by 5.3%, reflecting the benefit of the Funky Pigeon acquisition and continued growth in wholesale partnership. Second, adjusted earnings per share increased by 1.6% to 2.9 pence, supported by the benefit of the share buyback program. Adjusted profit before tax was 12.7 million compared with 13.2 million last year. This was mainly the result of the planned investment in digital during the Funky Pigeon integration and transition period, which balanced the improved performance in store. Third, our core store business improved profitability despite lower UK footfall and like-for-like sales. This reflects stronger product margin, continued cost discipline and further benefits from simplifying scale. And fourth, the group continued to generate strong cash. Free cash flow over the last 12 months was 47.8 million, an increase of 9.9 million year-on-year. Lastly, we remain committed to predictable and progressive shareholder returns. The board has declared an interim dividend of 1.4 pence per share, an increase of 7.7%. So the overall picture is one of resilient operating performance, strong cash generation with improved store profitability, funding, continued investment in the future growth and efficiency of the group. Returning to revenue in more detail. Group sales increased by 13.2 million to 260.8 million, representing growth of 5.3%. The principal driver was digital, where sales increased by 12.8 million, reflecting the full period contribution from Funky Pigeon following its acquisition last August. and August last year. Excluding the incremental contribution from Funky Pigeon, group sales were broadly flat year-on-year. Wholesale partnerships contributed a further 2.2 million of growth. This included double-digit organic sales growth. Garmin and Galana continued to perform in line with expectations. Store sales reduced by 1.8 million to 226 million. Within that decline of minus 0.7%, UK like-for-like sales were down 2.3%, reflecting lower consumer confidence and weaker footfall. This was partially offset by the contribution from net new stores and a particularly strong performance in the Republic of Ireland, where like-for-like sales increased by 5.6%. There are two important conclusions from this performance. The first is that the UK consumer backdrop has been challenging and has affected transaction volumes in stores. We cannot control footfall on the high street, but we can influence the shopping baskets of our customers when they are in our stores. The second is that our digital business, our wholesale business, our international operations and the new stores are broadening the sources of growth beyond UK store like-for-like sales. That diversification is important. It increases our customer reach and creates additional platforms for future growth. While our core store estate continues to be the engine and operational foundation for the group. Moving from revenue to profitability, adjusted PBT was $12.7 million compared with $13.2 million last year. The movement reflects two contrasting dynamics within the group. The first is a strong underlying improvement in UK and Republic of Ireland store profitability. Higher product margins and lower operating costs more than offset the impact of negative UK like-for-like sales and inflation. This demonstrates the benefit of the actions we have taken on range, pricing, sourcing and operational efficiency. The second dynamic is the planned investment in digital. The mission was clear when we acquired Funky Pigeon about a year ago, to create one digital business and rebuild the iconic Funky Pigeon brand. As we discussed, this year is therefore an integration and transition year for Funky Pigeon and cartfactory.co.uk. During the first half we invested in brand building media for funky pitching, organizational integration and the operating capabilities required to bring the two businesses together. That investment reduces current and others. Within wholesale partnerships, Gavin and Galana continued to make a positive contribution and performed in line with their acquisition economics. as a greetings was behind our expectations. We're taking actions to improve its performance. To summarize, store profitability improved despite the difficult macroeconomic backdrop. This stronger underlying profitability provides a solid foundation for delivering our second half plan. At the same time, we deliberately invested in integrating and the future growth within digital. Darcy will talk more about the future growth later in his section. Looking more closely at UK stores, the key point is that the profitability improved despite lower sales. That improvement was driven by a 200 basis point increase in the product margin rate, together with store efficiencies and benefits from simplifying scale. This more than offset the impact of lower sales and continued inflation. UK store sales declined by 1.4%, like-for-like sales were down 2.3%, partially offset by 0.9% growth from net new stores. The principal issue was footfall. Weak consumer sentiment, hot weather and pressure on disposable incomes among our core customer groups resulted in fewer store visits and transactions. External industry data indicated that footfall in the locations in which we operate reduced by around 3.5% during the first six months. Consumer confidence remained below the prior year level in the first half with reported signs of improved consumer sentiment over the last three months. Average basket value increased again in line with our strategy, partially compensating for the lower number of transactions with our card market share remaining in line with last year. This tells us that the customers who visit our stores continue to respond positively to the expanded range and value proposition. Building on this foundation, our plans for the second half will further strengthen our offer. We are sharpening our entry-level value offer, making value more visible in store, broadening the celebrations range and improving store standards and executions. We also continue to manage margin and operating costs carefully. The results in the first half demonstrate that these self-help actions protect and improve profitability even when the external environment remains difficult. Our core store estate remains highly profitable and cash generative. Store EBITDA over the last 12 months increased by 5.7% to 50.4 million. That improvement reflects higher profit margins, optimized store operations and efficiencies that more than offset inflation. Store revenue was $226 million. The UK performance reflected the consumer pressures I have just described, while the Republic of Ireland delivered strong like-for-like growth. Average basket value is now at £5.13, having increased by 16.5% over the last three years. Importantly, gift and celebration essentials now represent 55.4% of our in-store sales compared with 53.4% last year. This continued change in mix supports our strategy of moving from a cart specialist towards a broader celebration occasions retailer. It also gives customers more reasons to shop with us and provides further opportunities to increase basket size and share of wallet. The estate now consists out of 1,126 stores across the UK and the Republic of Ireland. We added 23 net new stores over the last 12 months, including 9 net additions in the first half of this year. The low capital nature of our store model allows us to continue expanding selectively and our pipeline of potential openings remains strong. We continue to assess the performance and future potential of every location, including underperforming stores. Our objective is therefore not simply to create a larger estate, it is to create a better and more productive estate with the right range, space and customer proposition for each location. The improvement of in-store profitability is closely linked to the continued delivery of simplifying scale. As discussed, we expect full-year inflation of between 3 and 4%. Against that, our plans are on track to deliver close to 10 million of efficiencies and structural cost reductions this year, with around 40% delivered in the first half. The benefits come from a broad range of initiatives. Store hours have reduced by 7% year-on-year through better optimized store operations, while maintaining the focus on service and store standards. In the warehouse, the introduction of voice picking is improving efficiency. Within the support center, we are simplifying and automating activities, including the use of AI. We are also securing low purchasing prices and bringing selected third-party manufacturing activities in-house. The importance of the program is not limited to offsetting inflation in the current year only. Each initiative is intended to remove complexity or structurally reduce the cost base. The benefits therefore support profitability this year and provide a stronger operating platform for future growth. Turning to cash, the group's cash generation remains a significant strength. Over the last 12 months, we generated 47.8 million of free cash flow. In the first half itself, we generated positive adjusted free cash flow of almost 1 million pounds. that may appear modest in isolation but it represents a significant improvement given the normal seasonality of the business and the cash investment typically required ahead of the key It is also noteworthy that this is the first time in the last 10 years that the free cash flow was positive in the first half. Continuous progress on working capital management was the key to this improvement, alongside a tax refund in relation to previous years. Capital expenditure in the first half was $11.8 million compared with $7.6 million last year. This included investment in additional manufacturing capability and the new HR information system as well as expenditure associated with the digital integration. This year we expect free cash to again exceed 30 million. This is at the lower end of our target cash conversion range, primarily due to the one-off capital investment required to deliver funky pigeon synergies and enhance our manufacturing capability. These are deliberate investments. They increase expenditure in the current year but are intended to reduce future operating costs, improve control of the value chain and support future growth. From next year on, we expect capital expenditure to return towards the lower end of our 20 to 25 million guidance range. The central message is therefore that the underlying cash generation of the business remains strong, even while we fund the investment required to improve the future operating model. Cash generation continues to translate into balance sheet strength and flexibility. Net debt increased by $8.5 million to $87.4 million. This increase was after funding the acquisition of Funky Pigeon as well as shareholder returns of $28.5 million by way of dividend and share buybacks. Net debt excluding the funky pigeon acquisition and associated transaction costs reduced by $18.9 million. This demonstrates the underlying cash transitive capacity of the group. Adjusted leverage was just below 1.1 times at the half year. This remains comfortable inside our maximum target of 1.5 times. The group has total revolving credit facilities of $160 million, providing material liquidity and financial flexibility. We therefore retain the capacity to invest behind a strategy and support progressive dividends while maintaining conservative financial guardrails. Our approach to capital allocation remains clear and unchanged. The first priority is to maintain a strong balance sheet. This provides resilience through the economic cycle. The second priority is to invest in the delivery of our plans. This includes investment in new stores, digital integration, manufacturing capabilities, systems and the operating efficiencies required to support long-term growth. The third priority is to support sustainable and growing dividends. Finally, where the group has surplus cash after meeting those priorities, we intend to return that cash to shareholders over time. The financial guardrails remain equally clear. We target adjusted leverage below 1.5 times, free cash conversion of between 70 and 80%, and dividend cover-off between 2 and 3 times adjusted earnings. Over the medium term, we continue to target mid single-digit group revenue growth and mid to high single-digit adjusted PBT growth. The drivers of that growth are diversified. They include store-like for like growth, new store openings, digital growth and wholesale partnerships. Benefits from simplifying scale and operational leverage from our vertically integrated model. Disciplined capital investment and working capital management that converts growth into cash. It is this combination of growth, cash conversion and disciplined allocation that underpins the potential for attractive shareholder returns. We intend to maintain that discipline. Returns will be supported by the strength of the business, not by increasing leverage beyond our stated guardrails. Turning finally to shareholder returns. Our objective is to provide predictable, sustainable and growing cash returns. The board has declared an interim dividend of 1.4 pence per share, equivalent to approximately 4.6 million payable in December this year. This represents an increase of 7.7% compared with last year. The interim dividend is based on our expectation of a progressive full-year dividend and the dividend cover ratio consistent with last year. We have completed 83% of our 15 million share buyback announced with our full-year results. Shares purchased under that program are being cancelled. These returns have been funded from the cash generated of the business while maintaining leverage comfortably inside our maximum target. Following last year's 5 million anti-dilution share purchase program, we intend to launch another 3 million anti-dilution share purchase program upon completion of the current 50 million share buyback. Those shares will be held in treasury to satisfy future employee share scheme awards and to prevent shareholder dilution. Looking forward, we expect to generate more than 30 million of free cash flow in FY27 and expect the group to pay a progressive dividend in line with our policy. Our approach is consistent. Disciplined investment, conservative leverage, and the return of surplus cash when it is appropriate. Darcy, back to you.