Card Factory Share Discussion Threads

[wiseman1967] 16/8/2019 11:07

I also didn't say balance sheets are irrelevant. I said balance sheets are more important for property companies than asset light companies which tend to be valued on a multiple of profits.

[wiseman1967] 16/8/2019 11:06

Simba. You can't simply look at the absolute figure of goodwill to decide whether it needs to be impaired. It is goodwill relative to the profits of the business. £300m of goodwill relative to £90m of ebitda is fine. In the case of getting personal the goodwill was too high relative to the earnings and so was written down. I believe the goodwill on GP was £14m and profits in the 2018 accounts were in the order of £2m but have fallen since given this business (GP) has falling sales.

[simba_] 16/8/2019 10:34

Exactly fenners. I also questioned the goodwill but wiseman says balance sheets are irrelevant. Then went on to say that problem here is that investors don't undetstand. .+300m is a ridiculous amount of goodwill for a birthday card shop. Didnt they also just take an 11m impairment hit relating to the gift business (can't remember what its called).

[wiseman1967] 16/8/2019 08:46

1novice and Smokybenchod. I would like to say that your scaremongering baseless opinions will be missed here, but they won't. Go find another profitable growing company to attack, but don't be surprised when someone else points out your ignorance there. You can't expect to make crass comments like this business is headed for a CVA and not have them challenged. I would welcome a discussion of why you think that but every time I ask you to justify the comment you fail to. Good riddance.

[smokybenchod] 15/8/2019 17:38

1novice, I posted the exact point as you regarding declining share price and profits with increasing stores and was ridiculed on this board by another poster. It is a shame as this was once an interesting discussion forum although seems to have been overtaken by emotional, rude, blinkered investors that cannot have a bad word said about CARD, no matter how valid the points. For that reason I’m going to avoid this board going forward.

[1novice] 15/8/2019 17:20

Sorry wiseman, I didn't realise yours was the only opinion that is right and everyone else is wrong and therefore "incompetent/idiot/ or worse.
I made a lot of money on these, when they peaked.
But if you think that doubling their store numbers since floating while the share price slides and like for like sales stagnates is good then you deserve to get stung.
I genuinely hope you lose big on these for your arrogance and rudeness to others

[fenners66] 15/8/2019 16:34

So it seems PI bought a business, fine, more than net assets so goodwill added to the acquiring company's balance sheet.
Generates some cash and pays down some of the borrowings used to buy it.
I guess they also structured it so they lent the money to their entity which acquired CF and then charged interest on that loan.
After that they borrowed more cash and repaid the PI loans ?
Then floated their ownership on the stock market and got their cash back and some profit.

Of course PI usually knows the right time to part with a business - look at DEBS for example.

What the stock market is left with (bizarrely ?) is a business with few assets, loaded with debt and goodwill in itself.

The goodwill was purchased but not by the current owners.. so to speak.

Funny how you cannot have the goodwill of a business you have built from scratch only the one you purchased.So even if its overpaid for the goodwill can remain on the balance sheet until some auditor gains the balls to challenge the valuation.

[wiseman1967] 15/8/2019 15:41

Hi Fenners66. According to Wikipedia, the business was acquired by private equity in 2010 for £350m. The goodwill is the difference between the price paid and the net assets at the time. The CF accounts suggest £314m relates to CF and £14m to Getting Personal. Under accounting standards this no longer needs to be amortised as long as it is subject to regular impairment testing (note 11 of the financial statements). If the buyer had paid £450m the goodwill would have been £100m higher. It is not an asset like tangible assets but not something to get concerned over in my view.The business describes itself as vertically integrated in its accounts in the first ten pages. They print their own cards (they bought a printing facility called Printcraft in 2009 - it currently prints 200m cards pa and has a capacity of 400m). I suspect the purchases from China are the non card ones (eg balloons).Page 10 outlines the business model and so its barriers to entry - generally because of scale: a design team that redesigns 4,000 cards each year, print facility printing 200m cards each year, warehouse space of 360,000 square feet and 975 high street stores. Not easy to replicate that.

[fenners66] 15/8/2019 14:06

£328m of goodwill in the last accounts RNS - does not say where it came from.

Previously you mentioned this being a vertically integrated business and with barriers to entry.

I thought they bought in the cards from China and therefore are not vertically integrated - they may design them but I don't believe that constitutes barriers.

[renewed1] 15/8/2019 13:46

Thanks Wiseman..... I appreciate your analysis/views whether shared or not.

[wiseman1967] 15/8/2019 12:20

Before the IPO, CF had a higher level of debt. On IPO it listed with a reduced level of debt representing somewhere between 1.5-2.0x ebitda. I can't find where I read this now, but believe it is the stated policy of the company to stay within this range. As the business generates cash, debt reduces from 2x ebitda towards 1.5x, then they pay out a special dividend to shareholders and it returns towards 2x again. The reason it has grown since IPO is that the ebitda has grown and so 2x a higher ebitda figure leads to a higher debt level.

[fenners66] 15/8/2019 11:52

a most enlightening line of argument...

LOL

Do we know how they got to £170m debt?

[wiseman1967] 14/8/2019 23:30

1novice, we are all entitled to our opinions (and given your real world card retail experience, you should really know better). When you suggest that one of the most profitable (if not the most profitable in % terms) retailers in the FTSE 350 is headed for a CVA, then you should not be surprised that you are challenged on such a baseless comment. CF makes c£90m of ebitda on £400m+ of sales, dominates the value segment in greeting card retail, with a unique vertically integrated business model, has huge barriers to entry, and it is still growing. Would you mind explaining to the chat group how this business is headed for a CVA? Do you actually have an investment in CF or are you simply an investment troll spewing b*llox about one of the great retail success stories of recent years? Many of the businesses that you have been involved with have either gone bust or are trading poorly - but this is mainly because the superior CF business model has left them trailing in its wake. Perhaps this is why you have a vendetta against them?

[scobak] 14/8/2019 23:03

Thanks Wiseman. I am grateful for your input. Whilst not advocating the debt be completely cleared, it would be reassuring to see that it is not going to go up each time CF reports or even a reasonable reduction. Shows up also as a reassurance that the BoD are in control and managing this company prudently and effectively

As a postscript, have been to my local 2 stores and appears that a large proportion of the christmas stock has already been sent out to stores. As this has to be financed,
I would look to debt being under control after the christmas trading period

[fenners66] 14/8/2019 22:31

Its not just about the debt that you have its what you got in exchange for it.

So received wisdom for house mortgages over the last 50 years is buy a house with a mortgage attempt to pay it off but sit back and watch the value of the house increase - the leverage of a larger mortgage promises higher returns.

What does CF get for its debt ?
Opens a new shop , spends on shelving etc. and then in a few years if you are still renting the premises spend it all again.

There is nothing in the short lease that suggests a potential capital gain to me.
So where did £170m come from?

[1novice] 14/8/2019 21:47

As you Wiseman, I too am entitled to my opinion. I know little about you but I have been in the real world in this industry and surrounded by owners,retailers, directors of many card retailers including Clinton's, ukg, Hanson white and more. I have forgotten more about this industry than most pretend to know about it.
I wish you well in your investments, but may I suggest you dont believe your own hype or you may get burned. Good night

[wiseman1967] 14/8/2019 11:28

Scobak, the debt represents 1.7x ebitda. As you say on a store level this represents £170k per store (against contribution of £100k). Let's say your salary were £100k, would you be concerned about a £170k mortgage? Most banks/building societies would happily lend you 3-4x your salary. CF could easily pay down the debt to zero over 2-3 years by reducing dividends but it is prudent financial management to have a limited amount of leverage - it will increase returns to shareholders as well as provide a tax shield, reducing the corporation tax they have to pay (profits are taxed after an interest charge). Some people choose to only buy a house when they can fund it with 100% equity but most accept that it is more efficient to part fund with some debt (provided they can service this easily). If the CF interest were 5%, then the annual charge would be £8.5m - that would be more than 10x covered by ebitda/cash flow.

[wiseman1967] 14/8/2019 11:17

Simba - in my view the issue with the shares is a lack of understanding by investors. I believe the business is strong and my main two concerns on that would be (I) danger of complacency given their strong market share (see what happened to Clinton's) and (2) an unwillingness to increase prices to offset inflationary pressures.

[wiseman1967] 14/8/2019 11:11

Hi Simba. The balance sheet is relevant if you are valuing the business based on net assets - for example with a property company. This is an asset light business and capex is low relative to earnings. As such I would value this (and most businesses) on a multiple of profits/cash flow. Look at the internet based businesses such as Apple, Google and Amazon - they are also asset light businesses.

[scobak] 14/8/2019 10:20

Biggest problem is the huge amount of debt which needs to be pruned. If steps can be made to tackle or mitigate this then I will return to reinvesting the divi instead of taking cash as I have done the last 3 dividends.

[simba_] 14/8/2019 09:51

What do you see as being the problems here then, wiseman?.

[simba_] 14/8/2019 09:49

Hi, wiseman. Thanks for the response. If I remember correctly, goodwill was around 80% of assets. If thats not a concern on a BS what is?. Especially with a retailer. The BS is toast when its excluded. Any impairments will be expensed to the IS.

[wiseman1967] 14/8/2019 09:49

Fair point - it was 20.5% down from 22.3% the year before. At IPO it was 25%. The drop is almost entirely attributable to the fall of the pound against the dollar. It doesn't change my point about this being a strong business and nowhere near a CVA as novice1 suggested.