Card Factory (LON: CARD) shares have jumped 32% in London this morning. This is off the back of what might seem like a fairly trivial announcement. CARD has been able to refinance its loan package. Given that the new terms aren’t all that different from the old ones why would this have such an effect on the share price?
The answer being that a pretty massive potential dilution of the shareholders is now off the table. In fact, given the language the board uses to announce this such an equity raise is now not just not needed but isn’t going to happen any time soon.
Card Factory shares have taken a beating over the years for two unrelated reasons. One is structural, the other just one of those things. The structural one is the internet, the one of those things clearly lockdown.
So, the structural problem is that, as we can imagine, card shops have been suffering from the irruption of the internet. Companies like Moonpig are taking at least part of the business. The whole technological change is leading to at least some use of e-cards rather than physical. Then there’s the whole idea of life just moving more online and folk getting out of the habit of doing things in meatspace.
This doesn’t have to be terminal because we can all imagine there being at least a slice of the market left. Further, there can indeed be very good money in a managed decline – or, to taste, in sweating the last out of a market sector. The trick is to be able to manage costs as against revenues even if the total market is shrinking.
Then there’s events, dear boy, events. Clearly lockdown had horrible effects on a physical world retailer. Plus given the absence of parties and gatherings that move to e-communications jumped ahead. The question here is whether there’s a business to revive after that. Will people have entirely got out of the habit? Or will we see a bounce back in usage? There’s no one fits all answer here, it seems to be going sector by sector – online clothes continuing to motor ahead for example.
The combination of these two factors left Card Factory with a somewhere between bad and terrible capital structure. Debt was way too high. Of course, bankers are being reasonable at present but still. Card Factory had had to agree to raising £70 million in new capital in order to keep its lending facilities. Given market cap until today that would have meant a perhaps 50% dilution of CARD shareholders.
Which is why the news today has boosted that share price so much. Card Factory has been able to renegotiate the lending facilities on reasonable enough terms. Largely the same as they were before in fact in terms of capital repayments, interest rates and so on. The big difference is that the insistence on a capital raise has now been dropped. That means no dilution.
What the future holds for Card Factory, now this cyclical event is out of the way well, that depends upon that structural change in the market and how well the management are able to deal with it.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.