Christmas came early, but not in a good way for Card Factory! The greetings card retailer delivered a shock profit warning right in the middle of its most crucial trading period, sending shivers down investors' spines and causing share prices to plummet. But what exactly went wrong? Let's dive in.
Card Factory, which also owns the online card and gift brand Funky Pigeon, pointed the finger at the economic pressures squeezing UK shoppers. They stated that this has significantly dented consumer confidence and altered shopping habits, leading to a noticeable drop in high street footfall.
"It is an inescapable fact that these pressures have impacted consumer confidence and shopping behaviour," the company said in a trading update.
And this is the part most people miss... The company now anticipates annual adjusted pre-tax profits to fall between £55 million and £60 million. This is a stark contrast to their previous forecast of mid to high single-digit percentage growth on last year's adjusted profits of £66 million. The market reacted swiftly, with shares dropping over a quarter in early trading, though they later recovered slightly, ending down by 23%.
Card Factory has a long-term strategy in place, including a productivity and efficiency program designed to combat "ongoing high inflation." However, the impact of consumer spending, even before the budget announcement, has hit store footfall and sales, a trend that continued into December, according to Kate Calvert, an analyst at Investec. She added that Card Factory doesn't believe it can recover the lost sales in the remaining weeks of the year.
But here's where it gets controversial... The company is also facing the long-term shift away from traditional physical cards. The Royal Mail, for example, delivers around 6.6 billion letters annually, a significant drop from the 20 billion two decades ago. The postal regulator, Ofcom, predicts this number will fall to 4 billion in the coming years.
Adding to the woes, the cost of postage stamps has skyrocketed. A first-class stamp now costs £1.70, a rise that occurred in April, and the sixth increase in just over three years. A second-class stamp will set you back 87p. Ofcom has even allowed Royal Mail to end second-class Saturday deliveries and reduce service to alternating weekdays from Monday to Friday.
On a brighter note, Card Factory's operations outside the UK, including those in North America and the Republic of Ireland, are performing as expected. The integration of Funky Pigeon, which Card Factory acquired from WH Smith for £24 million in July to boost its online presence, is also "on track." The board remains confident in the group’s long-term strategy.
In related news, WH Smith is delaying the release of its annual results due to accounting issues. The results, initially scheduled for November 12th, have been pushed back to December 19th. This follows the departure of WH Smith's chief executive, Carl Cowling, after an investigation uncovered accounting failures in its North American division. These errors, first identified in August, led to an overstatement of profits in its US business by as much as £50 million. The Financial Conduct Authority is currently assessing whether WH Smith breached UK disclosure rules, but no formal investigation has been launched. In March, WH Smith agreed to sell its 480 high street stores to Modella Capital.
What do you think about the challenges facing Card Factory and the shift away from traditional cards? Do you believe the company can adapt to these changing times? Share your thoughts in the comments below!**
