Can this special divi survive retail chill?

Income stock Card Factory is feeling the trading heat, but will its promise of special dividend later this year survive? Graeme Evans takes a look.

Despite another Card Factory profits warning, the mood among the company's income chasing followers may well be relief that things are not a lot worse.

That’s because Card Factory's promise to pay shareholders a special dividend of between 5p and 10p later in this financial year is still in place, helped by continued strong levels of cash generation. There are also pockets of trading encouragement, not least a decent performance around Father's Day.

Shares still fell 10%, however, to leave the stock some distance from the 225p seen at its May 2014 IPO and the 347p achieved less than year ago. 

Liberum thinks the shares are now worth about 195p, having downgraded its target price from 210p in the wake of today's warning - the third time the company has issued an alert on profits in the space of a year.

The broker has cut its earnings per share forecasts by 7% for 2019 through to 2021, continuing a cycle of downgrades. A year ago Liberum was looking for 2019 earnings of £103.9 million, but this is now down 15% to £88.2 million.

That's slightly below the company's new guidance of between £89 million and £91 million, which is still dependent on the key Christmas trading period.

Liberum also suggests that for ever 1% decrease in sales, about £2.5 million of the dividend will need to be paid out of debt. 

Card Factory said today net debt at the end of July reduced slightly to £159.8 million, with strong operating cash generation more than covering the payment of the 2018 final dividend of £21.9 million.

Liberum currently forecasts a special dividend of 7.5p and a 2019 yield of 8.3%, but warns that the award could still end up being towards the lower end of the 5p-10p range in the event there’s a further deterioration in earnings.

Card Factory blamed extreme weather conditions and weak consumer confidence for its 0.2% decline in like-for-like sales in the six months to the end of July. Sales at its online business Getting Personal were down by 8.5% due to heavy discounting by rivals.

Despite the uncertain conditions, the company still opened a net 25 new stores in the first half, bringing its total estate to 940. It continues to work towards the addition of 50 sites in this financial year, including a number of retail park stores.

At a time when most other chains are closing outlets, Card Factory has said it hopes to have a "cost-effective estate" of around 1,200 shops.

It also differs from the rest as the only vertically integrated player in its sector. Having an in-house design team, printing facility and central warehousing capacity allows the company to operate with significantly reduced costs compared with rivals.

Fund manager Neil Woodford has been a fan of the company, describing it as a "well-managed, highly competitive and cash generative retailer".

However, today's latest profits warning will increase the pressure on chief executive Karen Hubbard, who has been in the role since February 2016.

She said today:

"Our key Q4 trading period will be critical in determining the final result for the year, but we believe we are well positioned to deliver a good performance in our important Christmas trading season."