Bill1703
12 Apr 2018
Re: Good points on both sides - confusion? "What I don't really understand is why borrow to pay a dividend (albeit only part)... Why not just pay a smaller dividend and use the remaining to lower debt... Surely this makes more sense long term..."Mong - it is at least clear that it is entirely deliberate... otherwise, they wouldn't have paid it. Special dividends are fully discretionary, even more so than ordinary divs (management will often go to great, and sometimes excessive, lengths to keep paying an ordinary dividend).It essentially comes down to "efficient balance sheet theory" - debt is cheaper than equity, particularly (but not entirely) due to the tax deductibility of interest payments, so it is more "efficient" to fund your business with a reasonable amount of debt. Of course, at some point the relationship reverses, if debt is so high as to jeopardise the sustainability of the capital structure... at this point, both debt and equity become progressively more expensive, exponentially so. So the challenge is, what is a reasonable balance of debt and equity? Companies have different views on this - and it will naturally vary (significantly) between different business profiles, depending on the relative stability, predictability and visibility of core profitability and cash flows, etc. CARD clearly think this is around 1.7x ND/EBITDA (to use the most commonly applied metric, by investors and rating agencies alike) - some companies see it as a bit higher, others somewhat lower.Of course, not everyone subscribes to the theory! For some, the best level of debt is none, and where there is debt, it should always be paid down as first priority - for them, it is very unlikely that what CARD have been doing will meet with approval. It's a view most prevalent among private investors, I would observe - but it is still an active debate among at least some professional market participants. But either way, it is at least clear what CARD thinks - there should be no confusion, whether you agree with it or not. FWIW I am a believer in the theory and strategy - the practical maths and economics of it are easily compelling enough - and I also think CARD have the balance broadly about right. In any event, as we discussed before, CARD are clearly now signalling that their balance sheet is now at the point of optimal "efficiency" - which means that future dividends (including specials) should only be declared within the constraint of current leverage levels.
the-mong
11 Apr 2018
Re: Good points on both sides - erratum What I don't really understand is why borrow to pay a dividend (albeit only part)Why not just pay a smaller dividend and use the remaining to lower debt. Surely this makes more sense long term
sound money
10 Apr 2018
Re: Results tomorrow You know what . The CEO at Greene King needs to take a few tips from Karen.
Bill1703
10 Apr 2018
Re: Good points on both sides - erratum "... net debt rose £25m last year (FY18), but after £83m in cash dividends (including c.£51m as "special"
- in other words, the business generated positive free cash flow of £58m AFTER new store investment, and positive net cash flow (c.£7m) after ALL of store investment and ordinary dividends."Apologies to all - as the eagle-eyed may have spotted, there is a mistake in my figures as previously quoted.CF generated positive net cash flow of c.£26m after all investment (including new store spend) AND ordinary dividend payments in FY18 - not the £7m I quoted (got my ordinaries and specials mixed up).What that means is the most recent 15p special divi was broadly half funded by residual free cash flow, and half by increased borrowings - or alternatively, if they hadn't paid a special (entirely discretionary), we would indeed have seen net borrowing falling by c.£26m, rather than rising by a similar amount. A pretty healthy picture I would say, and should offer considerable comfort to the debt-averse...
Bill1703
10 Apr 2018
Re: Good points on both sides "So I don't mind the investment in new stores, but let's not pretend the development and the special dividends are from free cash, it has required borrowing to do both."Marktime - it is "double counting" to argue that both store investment and special dividends has required borrowing. Yes, net debt rose £25m last year (FY18), but after £83m in cash dividends (including c.£51m as "special" - in other words, the business generated positive free cash flow of £58m AFTER new store investment, and positive net cash flow (c.£7m) after ALL of store investment and ordinary dividends.So yes, the "special" dividend commitment last year was funded only partly from "free" cash and partly from new borrowing - but I don't think they ever pretended otherwise? It was clearly predicated on the basis of "surplus" cash, with leverage (previously and otherwise) below stated target 'optimal' levels.Going forward, the situation is now clearer IMHO - they see the current leverage level (1.7x ND/EBITDA) as the medium term 'optimal' level, so all free cash flow (ie. after net store investment) can be returned in dividends, ordinary plus "special" - no more, no less. It doesn't mean net borrowing will not rise again, but only if cash profitability (ie. EBITDA) also rises, if they stick to their leverage targets (and they have again stated that they don't expect much growth in EBITDA for this year at least). "My biggest problem remains with the apparent mis-management of foreign exchange and the timing of peak buying at the worst possible import prices... Something really stinky..."You maybe make a more valid point there - albeit a tough one to put a precise finger on. One explanation (possibly too kind to them?) is they have stuck to their guns on hedging a broadly fixed proportion of forward costs, for a fixed period going forward... this means that they were probably less severely hit when the £ went through the floor, but conversely they are now benefiting less than they might've done with the recovery. And lest we forget - it's a decent recovery from the lows, but c.1.41 GBP/USD is still well below the 1.60 and more seen for much of the pre-2016 period. "The long term success of CARD rests on its ability to see off the competition and instead we have cheap and cheerful aisles in supermarkets and me-too ventures like Cards Direct emerging. I suspect there is little brand loyalty down at the discount end of the market, it is all being fought out on price."Yep, probably correct there too - we shouldn't rely on brand loyalty for CARD, and it doesn't sound like they are, either. Hence their reluctance to be seen to raising prices, although the reality (eg. with new, higher priced ranges) may be somewhat different. But brand awareness will still count, and this is still growing for CF... as will selecting and sustaining the best locations. People still want to buy cards - that is the good news - but they want to buy them as cheaply as possible (for the most part, anyway). It is up to CF to make it easiest, and cheapest, to do so at CF rather than anywhere else.
the-mong
10 Apr 2018
Clinton's Didn't they go bust a few years back and close most stores?
citro
10 Apr 2018
Birkenhead: Card Factory vs Clintons I bought two 500 lots fairly recently at 220 & 203 (inc. fees) and was showing a £200 loss as of yesterday. Now only a £57.50 loss on the fist batch but a £30 profit on the second so happy about that. I bought solely for the dividend but never nice to see them worth less. Anyway...downtown in good old Birko today I did my usual look at the 2 Card Factory shops and the Clintons one. Both CF had queues at the tills and people browsing whilst the Clintons didn't have a soul in it. No one...zilch, well apart from the saleslady at the till. Much bigger shop too so the rent & rates must be more. Something/one has to give one day.
marktime1231
10 Apr 2018
Good points on both sides while I am overweight in CARD I should be agreeing entirely with those sentiments which advance the sp, I think TX2 may have a point albeit somewhat extreme.On the one had CARD has increased borrowing by £25M or so to open about 50 new stores adding (hopefully) a ? £M recurring increase in revenues at about 22% margin, So it should be a pretty good investment. Retail is not dead after all, if you pile 'em high and sell 'em cheap. We are about 80% through the business plan with maybe 5 more years of expansion at this rate to come. That will require continued investment and some of that will be from increased borrowing unless CARD pays it down.On the other hand, as the report admits, recent increased net borrowing has been necessary to fund the special dividends elsewhere described as being paid "from spare cash". Who do you think you are kidding, someone. As a consequence debt is higher than I feel it should or could be. I was expecting a cut to the specials last year, and we had been prepared for an end to them now but someone has put the interests of rebooting the sp ahead of what might have been better for the long term of the business. I take your point Bill and agree this is a 275p stock (are we on our own), or it would be without so much debt, but it needs to find its level based on sustainable payouts not on special dividend bribes.All will be forgiven of course if a rebound in profit allows a 5-10p special AND net debt reduction.I wonder what was meant by opportunities for further vertical integration? Something with a cost attached?My biggest problem remains with the apparent mis-management of foreign exchange and the timing of peak buying at the worst possible import prices, costs are up £13M while foreign exchange hedges lost £7M (roughly). Eh? I am sure you will tell me if I have mis-read those numbers. Minus marks for finance and purchasing departments. Where in the report does it say we are going to get a £20M upside now we are back to $1.41 - instead it says foreign exchange headwinds should ease by 2020? Eh? Something really stinky.Add in the resistance to raising prices, increasing wages, small transaction values on low markup items, and an unconvincing website channel. Not much scope for efficiencies in an already efficient business. Lots of pressures even before we add in general High Street gloom. The long term success of CARD rests on its ability to see off the competition and instead we have cheap and cheerful aisles in supermarkets and me-too ventures like Cards Direct emerging. I suspect there is little brand loyalty down at the discount end of the market, it is all being fought out on price.Despite which CARD has made revenue progress and a healthy profit from its basic store formula and new store openings. A deserved response in the sp even before the special bribe. So I don't mind the investment in new stores, but let's not pretend the development and the special dividends are from free cash, it has required borrowing to do both.
contrarianstyle
10 Apr 2018
Re: Results tomorrow Share price getting a move on now up to 2.10
frusset
10 Apr 2018
Re: Results tomorrow "The entire business is not financed, practically speaking, by borrowing, but by a mix of equity and debt... in this case, some £680m of equity (340m-odd shares @ 200p) plus just over £160m net debt."Are you confusing market cap with equity on the balance sheet? ii is currently showing "Market Cap (GBP m) 679.163" (£697.67 million on Hargreaves Lansdown). On the balance sheet in the results, "Equity attributable to equity holders of the parent 218.4" (£'m).
sound money
10 Apr 2018
Re: Results tomorrow Bill,All good stuff. Thanks for the detail.Think what the results show along with Karen's mixture of "go get em" and sensible caution is that nothing has really changed.We have never had BAD results as some market commentators would suggest. For sure we have had "headwinds", how many times was that mentioned? To be honest there is nothing new here.The market had got it self into a lather over this, not grasping the business model or the niche high street roll. Lot to be said for the small investor counting the number of shoppers every time he goes by, and chatting up the manageress on occasions.😁The story is very much intact here although Games' comments about an undeserved beaten up share price are valid.M
zip00
10 Apr 2018
Re: Results tomorrow Bill1703Well said, surprising how many investors here do not really understand business, with the free cash flow Card have there is no pressure to write down debt in a hurry, and in any case only some £18m is due within the next five years, the rest is due at some point after that.I agree with on a fair price of £2.75, but I think it may not be too far away. I was particularly encouraged to see the comment that some prices had been raised, quite gently put in the report, as they still have this low price history surging in their veins. At 200p a good buy with an excellent divi and real potential for growth.zip00
II Editor
10 Apr 2018
NEW ARTICLE: Will this income stock continue to deliver? "After two recent profit warnings and a slew of bad news elsewhere in the retail sector, income investors may well have feared the worst ahead of LSE:CARD:Card Factory results this morning.To their relief, the company announced a 2.2% rise in the ..."[link]
Bill1703
10 Apr 2018
Re: Results tomorrow "But I do have a fundamental problem with the company.It has a horrible balance sheet with a mountain of debt, in fact the entire business and beyond is financed by borrowing.... Eventually this debt has to be reduced which means the majority of future profits need to be retained."And conversely, I have a problem with narrow accounting-led perspectives which ignore the practical realities of hard cash flow and real-world financing. On any reasonable measure, it is hard to defend the "horrible" tag for the CARD balance sheet.The entire business is not financed, practically speaking, by borrowing, but by a mix of equity and debt... in this case, some £680m of equity (340m-odd shares @ 200p) plus just over £160m net debt. I would call this relatively prudent, given the (relative) resilience of core revenues and cash flows... and likewise the current (and projected medium-term future) ND/EBITDA level of 1.7x, interest cover (EBIT) of nearly 30x, an 'Altman Z' score of 3.4 (comfortably above the traditional "comfort" level of 3)... etc, etc. Moreover, I think the debt rating agencies would broadly agree.In the real world, there is no such thing as "retained" profits, it's merely a notional accounting construct - you either retain cash, or deploy it in the business, or return it to shareholders, as ultimate capital owners. It makes little sense for CARD for hoard cash, after all core investment demands, until such time as debt is indeed deemed excessive - returns on cash are still next to nothing, and probably best (for us) that they return it rather than be tempted to deploy it outwith their core competence. The key point is, even with a moderate downturn in FY18 (due mainly to exceptional capex spend), free cash flow was nearly £60m (vs. £69m FY17) - in other words, they could pay down all net debt in well under 3 years, if they had to. Currently, they don't have to, and I think it would be ill-advised and excessively prudent as things stand.As for the FY results, I won't dwell on the detail but all very solid in the circumstances IMHO. With a couple of very encouraging (or more reassuring?) comments on market trends, as others have pointed out. Even on the lower FCF (as above), still a FCF yield of well over 8% @ 200p (vs. 10% for FY17) - with the clear (and new) steer that going forward, total dividends should broadly equal FCF now that leverage is in line with their medium term target.It's a long term story, of course, and I wouldn't expect any rapid return to previous highs in the current retail (and UK market) backdrop - but still worth 275p "fair value" for me. And even if it stays down here, you have the prospect of a reasonable equity market total return (ie. 8-10% pa) from dividends alone. Still a Strong Buy.
TX2
10 Apr 2018
Re: Results tomorrow Plus points.Firstly I am pleased for holders that the results have been reasonably well received.Secondly I commend the company on the detail in the accounts;the information they give on the overheads of the business is very clear & interesting.Whilst I agree that CARD is doing better than most retailers it is still having to work very hard indeed.Increasing number of outlets,product range etc but still margin & net profit level is in modest decline.I do not think it is going to get easier more importantly neither does the company.But I do have a fundamental problem with the company.It has a horrible balance sheet with a mountain of debt, in fact the entire business and beyond is financed by borrowing.At the moment it can finance the debt at present interest rate but this debt pile is increasing; by £25m last year which was spent essentially to fund the special dividend.Eventually this debt has to be reduced which means the majority of future profits need to be retained.
