CARD - Card Factory: ~8% Yield + ~6% Stock Buyback + ~2% growth = >15% equity returns at 2.3x EV/EBITDA without any re-rating

CARD.L — Card Factory: >15% annual equity returns at 2.3x EV/EBITDA, no re-rating required

TL;DR

• Vertically integrated UK greeting card business with a digital offering (Funky Pigeon acquisition) and upsell from adjacent products and services * Not a fantastic business model but it's priced as if it will completely die the coming years

; increasingly there is more value in these cigar butts than the market gives credit for

• Biggest risk is misallocation of cash by management e.g. not doing a buy-back next year but instead pursuing some digital M&A * I have former IBD M&A and PE experience in the UK; wrote the below quickly

with help of Claude

• ; highly suggest you do your own confirmatory research before investing

From FactSet:

FD Market Cap: £240m | EV: £307m EV/EBITDA FY Jan 2027E: 2.3x EV/FCF Jan 2027E: 9.5x Dividend yield: 7.6% (FY27E) → 8.1% (FY28E) → 8.8% (FY29E) Buyback: £15m announced May 2026 until 31 January 2027 = ~6% of market cap

What the business actually does

Card Factory is the UK's largest dedicated greeting card retailer - ~1,090 stores, vertically integrated from design through manufacture through retail. Average card price is reportedly £1–2 versus £4–5 at a supermarket or M&S. That cost advantage is structural, not cyclical: because they design and print in-house, competitors find it hard to match their economics at the shelf.

The key insight that I think investors tend to underweight: this business has recurring demand baked into its DNA. Birthdays, Christmas, Mother's Day, Valentine's etc. - these aren't discretionary trends, they're calendared human events that reset every year for every customer. The low average spend and high urgency / importance creates resilience and predictability.

Average basket value shift mix

Management's core basket-growth strategy is reallocation of store floor space away from cards toward higher-value gifts and celebration essentials (confectionery, soft toys, stationery, balloons, wrapping) - this drove average basket value from £5.07 to £5.26 in FY26, with gifts and celebration essentials now representing 52.5% of in-store sales, and Card Factory's 8.5% share of wallet against 60% of UK adults already shopping there implies significant room to capture more of the estimated £258 annual per-customer celebration spend.

The return maths (no re-rating assumed)

Yield + buyback alone gets you to ~13–14% annually. Throw in 2% organic revenue growth - which requires no economic miracle, and you're at >15% equity returns per year with the stock assumed to trade at exactly the same 2.3x EV/EBITDA forever. You don't need to believe in a re-rating to make money.

Why now and why not earlier

Reason: Combination of falling share price increasing the dividend yield + announced buy-back

For those with interest in the name, encourage you to look into the history of the company with Teleios Capital Partners (a Zug-based European small/mid-cap specialist).

They held approximately 20% of the company at peak and began reducing their stake in August 2023.

Based on the April 2022 TR-1 data (Teleios’ 20% stake, implied market cap ~£155m, ~45p/share) and the COVID-era price history (stock at 36p in March 2020, recovering to 80–100p through 2021), Teleios' average cost was most likely in the 45–70p range. Their achieved exit at ~120p implies approximately a 1.8–2x return over ~3–4 years with no dividend income during the hold.

Management - likely average

Current CEO Darcy Willson-Rymer has done the things that needed doing: reinstated the dividend, opened new stores, grown international partnerships, rebuilt the balance sheet. Credit where it's due.

But my view is that management are probably average quality. After all, it's just a £300m EV UK small-cap. You are not going to find any legendary capital allocators in such a business.

Funky Pigeon - online personalised cards acquisition

Card Factory acquired Funky Pigeon (online personalised cards) from WHSmith. Funky Pigeon is disclosed: £32m revenue, £5m EBITDA on a £24m acquisition (5x EV/EBITDA). It's ~6% of group revenue. Even if synergies don't materialise, it's not a risk to the thesis at this scale. And if the £5m+ synergy target is achieved, it's modestly additive.

Sense check with implied unit economics on a single store

(Derived with Claude from Card Factory annual reports and RNS filings — primary source. Not directly disclosed by management on a per-store basis.)

Group revenue FY25: £542.5m, of which store revenue is approximately £510m (after stripping out partnerships of £22.2m and a small online contribution).

Across 1,090 stores, this implies ~£470k average revenue per store per year.

Group EBITDA was £127.5m (23.5% margin) — however this is materially inflated by IFRS 16 lease accounting, which removes lease depreciation from EBITDA.

Adjusted PBT of £66m (12.2% margin) gives a more honest per-store profit of ~£57k at PBT level.

On fit-out capex of ~£100–150k per new store (management's "capex light" characterisation, consistent with total capex of £18.4m in FY25 across 32 openings plus IT spend), management guides a ~2-year payback - implying ~£50–75k annual cash return per store.

The EBITDA-level and payback figures are broadly consistent once central cost allocations are considered, but the IFRS 16 distortion is significant and anyone modelling this seriously needs to work from PBT or cash flow, not reported EBITDA.

Notable discrepancy on cash allocation

Worth flagging explicitly: management claims new store payback periods of 2 years - implying approximately 50% ROIC on fit-out capex of ~£100–150k per store. If this is genuinely true, why are they buying stock instead of opening more stores? I find this the most interesting unsolved question in the thesis.

Risks

1. The buyback/capex tension - optically strange capital allocation that management has not clearly explained 2. Buyback not continued next years and cash wasted on silly initiatives

What would change my mind?

Change in strategy (e.g. mgmt saying we want to do M&A to be an online platform) or change in cash allocation policy

Card Factory is fundamentally a flawed business model in this new age but it's a cash cow that should be milked for as long as it lasts, and that's ok.