Hi David, just curious as to how you’re getting to the 17-25% FCF yield? I know they had some one-off lease repayments which are due to fall away, but even after adjusting for those i don’t get to 17-25%. Cheers, Fred
"Their advantage stems from vertical integration, which means they design and print around 80% of their cards in-house, whereas their competitors are primarily supplied mostly by two suppliers, Hallmark and American Greetings"
and
"Furthermore, its inventory is financed by its suppliers resulting in a negative working capital cycle."
... I'm not sure how to add them up correctly.
If they make 80% of their inventory - the cards - in-house, how is their inventory financed by their suppliers?
Thank you! By inventory I meant raw materials. So mostly paper and ink. CARD imports that mostly from the Far East and then do designing and printing in-house
A little more clarity on how you get that FCF number. Could you share any projections you might have. 2023 Annual numbers and first half of 2024 show FCF numbers closer around 18-40M (cash from ops - capex - lease repayments and finance costs) which is closer to 5-10%.
Hi guys. They'll record around 60M in PBT in FY'24. That should lead to 100+M in OCF (excluding lease payments) if there aren't any WC one-offs. Their annual maintenance capex needs are 12.5M. In H1 2024, the total EV (including discounted leases) was 500M. That number will be (much) lower once year-end numbers are reported, owing to cash generation and debt repayement that occurred during H2 2024 (for instance, they generated 70+M in FCF in H2 2023 alone). Therefore, it doesn't take a lot to get us under that 6xEV/FCF mark
Well, you add them to the enterprise value instead of taking into account cash costs. However, the liability is on the books for ~100m but cash costs of these leases was 57m in 2022 and 43.7m in 2023. So your approach seems very optimistic. Also, the company capitalizes software development, which seems like absolute bullshit to me for a boring retailer.
For 2024, pretax cash flow was 105.2m. Subtract 9m in software development costs, 12.5m in maintenance capex and 37.5m + 6.2m in lease payments (as per the annual statements) and you end up with around 40m GBP in operating cash flow (~27m adjusted for cash tax payments). For 2023 it is 99.9 - 9.4 - 12.5 - 52.5 - 4.5 = 21m GBP in cash flow (~13m adjusted for cash tax payments).
And this is not just me making some numbers up, the company itself says in their RNS final results release: "Free cash flow, which we define as net cash before M&A activity, distributions or debt repayments, was £27.1 million." (and 16.7m in 2023). Numbers are slightly different because I use your normalized CapEx and didn't include financing costs apart from the leases.
As far as I am concerned this is an interesting stock but it is not remotely close to trading under 6x EV/FCF. They're hiding a lot of stuff in the cash flow statement.
I'm also curious about why cash rent expenses were way lower in 2024 than in 2023 and whether this is sustainable, given inflation. I believe last year included some deferred rent from the pandemic but I've not looked at this name in more detail.
Anyway, please don't take this the wrong way, it's a cool idea, thanks for sharing!
To get back to this, I think the key reason why adding back the lease liability to the EV is the wrong way to go about things is that all their leases have such a short duration. The company doesn't give much disclosure about how they calculate their lease liability but I don't think it takes into account that they continually have to renew their leases. Obviously, if you cash rent expenses are 40m or 30m per year then a 100m liability is way too low. That only assumes that you have to pay rent for the next three years or so, instead of into perpetuity.
It's worth noting that on page 148 of the 2024 AR they give estimates of the contractual cash rent costs for 2024 and 2025, which are about $29.5m / year. These numbers are probably still too low as during these two years ~40% of their leases expire and have to be renewed (page 59: "On average 20% of the lease portfolio renews each year").
If you want to add back the leases to the EV I'd say a more realistic number is something like 40m into perpetuity discounted by 12% p.a. or something like that, or roughly 300m GBP. But I think it is far less error-prone to adjust for cash rent expenses in your FCF.
You're correct on most points here and I appreciate you pushing-back. I made a mistake on CARD and it's not as cheap as I thought, so I'm out. Thank you!
Gross profits, not gross margins. GMs will likely go down over the long term as product range shifts more toward celebration essentials. As I stated in the article, if the slow industry decline continues, it'll hurt the competitors far more than it will CARD, resulting in the bigger drop in supply(shelf-space) than demand. Therefore, physical store revenues might go down in the long run, but GPs should (will) remain stable
Hi David, just curious as to how you’re getting to the 17-25% FCF yield? I know they had some one-off lease repayments which are due to fall away, but even after adjusting for those i don’t get to 17-25%. Cheers, Fred
Hi, first of all, thanks for the article! :-)
In reading the following two statements...
"Their advantage stems from vertical integration, which means they design and print around 80% of their cards in-house, whereas their competitors are primarily supplied mostly by two suppliers, Hallmark and American Greetings"
and
"Furthermore, its inventory is financed by its suppliers resulting in a negative working capital cycle."
... I'm not sure how to add them up correctly.
If they make 80% of their inventory - the cards - in-house, how is their inventory financed by their suppliers?
Thank you! By inventory I meant raw materials. So mostly paper and ink. CARD imports that mostly from the Far East and then do designing and printing in-house
Ok, understood! Thanks for clarifying.
A little more clarity on how you get that FCF number. Could you share any projections you might have. 2023 Annual numbers and first half of 2024 show FCF numbers closer around 18-40M (cash from ops - capex - lease repayments and finance costs) which is closer to 5-10%.
Hi guys. They'll record around 60M in PBT in FY'24. That should lead to 100+M in OCF (excluding lease payments) if there aren't any WC one-offs. Their annual maintenance capex needs are 12.5M. In H1 2024, the total EV (including discounted leases) was 500M. That number will be (much) lower once year-end numbers are reported, owing to cash generation and debt repayement that occurred during H2 2024 (for instance, they generated 70+M in FCF in H2 2023 alone). Therefore, it doesn't take a lot to get us under that 6xEV/FCF mark
Why a you exluding the leases?
I'm not. Wdym?
Well, you add them to the enterprise value instead of taking into account cash costs. However, the liability is on the books for ~100m but cash costs of these leases was 57m in 2022 and 43.7m in 2023. So your approach seems very optimistic. Also, the company capitalizes software development, which seems like absolute bullshit to me for a boring retailer.
For 2024, pretax cash flow was 105.2m. Subtract 9m in software development costs, 12.5m in maintenance capex and 37.5m + 6.2m in lease payments (as per the annual statements) and you end up with around 40m GBP in operating cash flow (~27m adjusted for cash tax payments). For 2023 it is 99.9 - 9.4 - 12.5 - 52.5 - 4.5 = 21m GBP in cash flow (~13m adjusted for cash tax payments).
And this is not just me making some numbers up, the company itself says in their RNS final results release: "Free cash flow, which we define as net cash before M&A activity, distributions or debt repayments, was £27.1 million." (and 16.7m in 2023). Numbers are slightly different because I use your normalized CapEx and didn't include financing costs apart from the leases.
As far as I am concerned this is an interesting stock but it is not remotely close to trading under 6x EV/FCF. They're hiding a lot of stuff in the cash flow statement.
I'm also curious about why cash rent expenses were way lower in 2024 than in 2023 and whether this is sustainable, given inflation. I believe last year included some deferred rent from the pandemic but I've not looked at this name in more detail.
Anyway, please don't take this the wrong way, it's a cool idea, thanks for sharing!
To get back to this, I think the key reason why adding back the lease liability to the EV is the wrong way to go about things is that all their leases have such a short duration. The company doesn't give much disclosure about how they calculate their lease liability but I don't think it takes into account that they continually have to renew their leases. Obviously, if you cash rent expenses are 40m or 30m per year then a 100m liability is way too low. That only assumes that you have to pay rent for the next three years or so, instead of into perpetuity.
It's worth noting that on page 148 of the 2024 AR they give estimates of the contractual cash rent costs for 2024 and 2025, which are about $29.5m / year. These numbers are probably still too low as during these two years ~40% of their leases expire and have to be renewed (page 59: "On average 20% of the lease portfolio renews each year").
If you want to add back the leases to the EV I'd say a more realistic number is something like 40m into perpetuity discounted by 12% p.a. or something like that, or roughly 300m GBP. But I think it is far less error-prone to adjust for cash rent expenses in your FCF.
You're correct on most points here and I appreciate you pushing-back. I made a mistake on CARD and it's not as cheap as I thought, so I'm out. Thank you!
Thank you for the article. Why do you believe that their gross margins will remain stable over the coming years?
Gross profits, not gross margins. GMs will likely go down over the long term as product range shifts more toward celebration essentials. As I stated in the article, if the slow industry decline continues, it'll hurt the competitors far more than it will CARD, resulting in the bigger drop in supply(shelf-space) than demand. Therefore, physical store revenues might go down in the long run, but GPs should (will) remain stable
Great work as always. Hit all the key points.
Thank you brotha!