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Shares in a number of UK retailers look good value. But the high street’s a tough place to be, especially with online retailers having lower overheads and more convenience for customers.
Earlier this year, WH Smith saw the writing on the wall and sold off its high street stores to focus on its travel operations. And there’s another company that’s looking for a similar transformation.
Greetings cards
Card Factory (LSE:CARD) operates over 1,000 physical retail stores primarily selling greetings cards. And this looks to me like a really tough business to be in.
There’s a lot of competition from online retailers, but the business – to its credit – does attempt to offer low prices. The trouble is, it’s hard to keep doing that as staffing and utilities costs increase.
The firm also described itself as one of the UK’s leading retailers of balloons. These are harder to buy online, but I doubt this is enough to justify a substantial brick-and-mortar retail presence.
This makes me wary about Card Factory’s core business. But the firm’s making some big moves to transform itself and I think these could make the stock much more interesting.
Transformation
Card Factory’s been working on is a partnership with Aldi. I think this is very promising – selling from a growing supermarket looks a better model than running specialised outlets.
More recently though, the firm’s acquired Funky Pigeon (from WH Smith) for £24m. The plan is to use the existing platform to establish a meaningful online presence.
As the old saying goes: if you can’t beat ‘em, join ‘em. With a few specific exceptions, high street retail’s having a tough time competing with e-commerce and Card Factory’s move looks sensible.
The share price has responded positive, climbing 8% on the news. That’s an unusual response to a takeover – shares usually fall as a result of the inherent risk in acquiring another company.
Valuation
In valuation terms, Card Factory shares certainly look cheap. Retail stocks don’t usually trade at high multiples, but a price-to-earnings (P/E) ratio of around 7 is low even by those standards.
Until the latest announcement, I thought this was largely justified. The obstacles for a high street retailer competing with online operators are significant and not to be overlooked.
The Funky Pigeon acquisition however, looks like a smart one in terms of value. Namely, the £24m price tag for a business generating average revenues of £32m.
For context, shares in Moonpig – the market leader – trade at a price-to-sales (P/S) ratio of 2. The companies aren’t identical, but it does look like Card Factory’s done a value-accretive deal.
A buying opportunity?
I think it’s hard to overstate the challenges brick-and-mortar retailers face when it comes to competing with e-commerce. The most obvious is inflation pushing up running costs.
Until recently, I didn’t see Card Factory as a business in a good position to deal with this. A focus on low prices offered limited opportunity to pass on increased costs to customers.
The latest acquisition however, may have changed that. I’m not rushing to buy the stock, but I do think it’s worth watching as it looks to establish its online presence via Funky Pigeon.
