Final Results

RNS Number : 1330U

Card Factory PLC

05 April 2016

 

Card Factory plc ("Card Factory" or the "Group")

Preliminary results for the year ended 31 January 2016

Another record year - 33% increase in final ordinary dividend

Card Factory, the UK's leading specialist retailer of greeting cards, dressings and gifts, announces its preliminary results for the year ended 31 January 2016. 

	FY16	FY15	Change
Revenue Store like-for-like growth Getting Personal like-for-like growth	£381.6m +2.8% +17.5%	£353.3m +1.8% +23.1%	+8.0%
Underlying EBITDA*	£95.0m	£88.2m	+7.7%
Underlying operating profit*	£85.3m	£79.4m	+7.4%
Underlying profit before tax*	£82.0m	£65.5m	+25.2%
Profit before tax	£83.7m	£42.7m	+96.2%
Underlying earnings per share*	19.1p	16.3p	+17.2%
Final dividend per share	6.0p	4.5p	+33.3%

*	Excludes non-underlying items, in particular costs relating to the IPO (FY15 only), debt refinancings and mark-to-market movements on derivatives not designated as a hedging relationship

·      Further progress on all four pillars of growth strategy:

1.   Like-for-like sales growth in existing stores

·      Further improvements in quality and range of both card and non-card products

·      Ongoing market share gains as new store openings mature

2.   Continuing new store roll out

·      50 net new stores opened in the period, bringing total estate to 814 at year end

·      Strong pipeline of further new store opportunities for FY17

3.   Delivering business efficiencies

·      Industry-leading underlying EBITDA margins maintained at 24.9% (FY15: 25.0%), notwithstanding mix effect from growth in non-card revenues and incremental share based payment charges following IPO

·      Business efficiency initiatives underway to provide partial mitigation of margin headwinds, in particular foreign exchange and the new National Living Wage

4.   Development of complementary online sales channels

·      Continued strong growth in Getting Personal (www.gettingpersonal.co.uk) 

·      Relaunch of Card Factory transactional website (www.cardfactory.co.uk) progressing well, with fivefold sales increase over prior year

·      Overall online revenue growth of 22.8% (FY15: 23.5%)

·      Appointment of Karen Hubbard as CEO Designate, announced in January

·      Year-end leverage of 1.30 times underlying EBITDA, towards middle of the target range of 1 to 2 times underlying EBITDA

·      Strong return to shareholders with total dividend up 25.0% at 8.5p per share (2015: 6.8p), and special dividend of 15.0p per share paid in November 2015

Richard Hayes, Chief Executive Officer, commented:

"This has been another excellent year for Card Factory.  We have continued to expand our store portfolio and grow our market share, and our complementary online sales channels are progressing very well.  We have maintained our industry-leading margins and believe that we are better placed than most to manage the increased cost pressures that our sector is facing.  Our strong cash generation has allowed us to deliver excellent returns to shareholders by returning surplus funds through both ordinary and special dividends.

"I am fortunate to have had the opportunity to lead Card Factory through an exciting period of growth and change.  It is a very strong business with a great team of people who have all contributed to growing the business from a small chain of discount stores to a vertically integrated high margin value retailer with over 800 stores nationwide and two transactional websites.  I would like, again, to welcome my successor Karen Hubbard, and to wish her and the team every success for the future."

Preliminary results presentation

A presentation for analysts will be held today starting at 9.30am at UBS Limited, 1 Finsbury Avenue, London EC2M 2PP. Those analysts who wish to attend are requested to contact Isabelle Grainger of MHP on the number below or at [e-mail].  A copy of the presentation will be made available on the Card Factory investor relations website (www.cardfactoryinvestors.com).

Enquiries

Card Factory plc                                              via MHP Communications (below)

Richard Hayes, Chief Executive Officer

Darren Bryant, Chief Financial Officer

MHP Communications                                     [phone]

John Olsen                        

Simon Hockridge

Notes

1.   Background information

Card Factory is the UK's leading specialist retailer of greeting cards, dressings and gifts. It focuses on the value and mid-market segments of the UK's large and resilient greeting cards market, and also offers a wide range of other quality products, including small gifts and gift dressings, at affordable prices.  Card Factory principally operates through its nationwide chain of over 800 Card Factory stores, as well as through its online offerings: www.gettingpersonal.co.uk and www.cardfactory.co.uk.

Card Factory commenced operations in 1997 with just one store and has expanded its store estate primarily through organic growth into a market-leading value retailer with a nationwide presence. The Group's stores are in a wide range of locations including on high streets in small towns through to major cities, shopping centre developments, out-of-town retail parks and factory outlet centres.

Since 2005 Card Factory has developed a vertically integrated business model with an in-house design team, an in-house printing facility and central warehousing capacity of over 360,000 sq. ft.  This model differentiates the Group from its competitors by significantly reducing costs and adding value to customers in terms of both price and quality, underpinning the Group's motto: "compare the quality, compare the price".

2.   Cautionary Statement

This announcement contains certain forward-looking statements with respect to the financial condition, results of operations, and businesses of Card Factory plc.  These statements and forecasts involve risk, uncertainty and assumptions because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements are made only as at the date of this announcement.  Nothing in this announcement should be construed as a profit forecast.  Except as required by law, Card Factory plc has no obligation to update the forward-looking statements or to correct any inaccuracies therein.

Card Factory plc ("Card Factory" or the "Group")

Preliminary results for the year ended 31 January 2016

CHAIRMAN'S STATEMENT

I am delighted to report that Card Factory has had another very strong year and continued to deliver on all aspects of its successful four pillar strategy:

-       growing like-for-like sales in existing stores;

-       rolling out profitable new stores;

-       focusing on delivering business efficiencies; and

-       increasing penetration of the complementary online market.

Card Factory continues to build on its position as the UK's market-leading specialist retailer of greeting cards, dressings and gifts and there remains a significant opportunity to further grow our market share.

The Group continues to generate best-in-class margins and excellent free cashflow, benefiting significantly from its unique vertically integrated business model.  This continuing strong performance has enabled the Board to recommend an increase of 33.3% in the final dividend to 6.0p per share (FY15: 4.5p per share).   Subject to approval by shareholders at our forthcoming AGM, this would result in an increase of 25.0% in the total ordinary dividend for the year to 8.5p per share (FY15: 6.8p per share), giving a dividend cover of 2.25 times earnings.  This is in addition to the 15.0p per share special dividend paid in November 2015. 

As a public company we have an opportunity to widen share ownership across our employee base.  This is an important aspect of stakeholder engagement and we were delighted that over 17% of all eligible employees chose to join the SAYE share scheme which was launched during the year. 

In January we announced the appointment of Karen Hubbard to the Board as CEO Designate, with effect from 22 February 2016.  Karen will succeed Richard Hayes as CEO of Card Factory in mid-April.  Richard has been with the Group since 2003, serving as Managing Director and CEO since 2008.  He had recently made the Board aware of his wish to step down once a suitable successor had been identified.  He will retire from the Board and leave the Group at the end of June 2016, having ensured a smooth transition over a four-month period. 

Richard has led Card Factory with enormous success.  Since he joined the senior management team in 2003 the Group has grown from a 40-store discount chain to a vertically integrated high margin value retailer with over 800 stores and two transactional websites.  Having led the business through an MBO, the 2014 IPO and its first two years as a listed company, it is fully understandable that he now wants to retire.  We are extremely grateful for all he has done and, when he steps down, it will be with our very best wishes. 

Karen, who has previously held senior positions in B&M, Asda and BP, has a huge amount of relevant experience in value retailing, both through store estates and multi-channel.  She has a great deal of energy and ambition for the business.   The Board is confident that Karen is the right person to take on the mantle from Richard to deliver the significant growth potential of the Group.

In summary, the Group has continued to deliver the strategy which the Board set out at the time of IPO almost two years ago.  I am confident that this track record of success will continue in the years ahead.

Geoff Cooper

Chairman

CHIEF EXECUTIVE OFFICER'S REVIEW

Overview

Card Factory has had another record year, generating strong growth in both revenues and profits, and delivering in all areas of our proven four pillar strategy:

1.   Continue to grow like-for-like sales in existing stores

The Group's consistent like-for-like (LFL) sales performance continued with annual LFL store growth of +2.8% (FY15: +1.8%), towards the upper end of the historic 5 year range of +1.4% to +3.2%.  We continue to target annual LFLs in line with this historic range.

This strong performance was driven by a number of factors, including further improvements in the quality and range of our card and non-card offerings, benefits of our new EPOS system, new merchandising initiatives and further market share gains as stores mature. 

The performance of the diverse non-card category, which typically has a lower gross margin than the card category, continues to be particularly strong.  Our Design Studio has significantly improved the quality of our non-card category over the past five years, generating incremental sales and increasing non-card sales mix from 35.3% in FY12 to 41.3% in FY16.  We expect this gradual trend to continue as we further develop and enhance our non-card offering.

As referred to below, we have started to refine and develop the multi-channel offering of the Card Factory fascia from a very low base.  Including sales from the recently relaunched Card Factory transactional website, the total LFL for the Card Factory fascia increased by +3.0% (FY15: +1.8%).  We believe that there is considerable potential to leverage the existing loyal and established store customer base.

2.   Continue to roll out profitable new stores

The Group's established new store roll out programme continues to be an important driver of sales growth for the business.

In the year under review, 50 net new stores were opened (FY15: 51), bringing the total estate to 814 stores at the year end.  During the year 10 stores were closed (FY15: 5) and 6 stores were relocated (FY15: 9).

The overall quality of our new store openings and their performance to date continues to be in line with our expectations.  The quality of our retail estate remains high.  Of our stores open for over one year, only five (less than 1% of the estate) were loss making, and their aggregate loss was only £0.1m at store contribution level. 

We have a strong pipeline of additional new store opportunities and remain confident of opening a total of approximately 50 net new stores in the new financial year.  

3.   Continue to focus on delivering business efficiencies

The Group continues to consistently deliver one of the best operating profit margins in the retail sector and we remain focused on delivering further business efficiencies and economies of scale. 

A key aspect of our strategy has been to ensure that this margin focus does not compromise our value proposition, particularly when faced with cost headwinds.  We believe that this approach is in the best long term interests of the company and shareholders.  As referred to in the Chief Financial Officer's report, we anticipate that the current significant cost pressures facing our sector, in particular foreign exchange rates and the new National Living Wage, will slightly reduce our operating margin percentage in FY17, post mitigation.  We have a number of business efficiency projects underway and, given our market leading position, unique vertically integrated model and superior margin structure, we believe that we are better placed than most to manage such costs pressures.  Indeed, our strategic response to such cost pressures often, in our view, strengthens our competitive position in the market.

We continue to leverage our investment in EPOS and our increased ability to analyse more granular sales data has contributed to the strong LFL performance in FY16.  The new system is now deployed in approximately 60% of stores and, given the characteristics of our retail estate, we can use this data to improve the performance of the whole estate.  In order to optimise the benefits of this system, we have recently commissioned an independent detailed review of a potential software upgrade to enable further system improvements and efficiencies.  We expect the conclusions to be available later this year.  In the meantime, we continue to deploy the current version in all new stores.

4.   Increase penetration of the complementary online market

Our online operations have had another strong year with total Group online revenues growing by 22.8% to £19.2m (FY15: £15.7m).

Getting Personal, which currently represents the majority of the Group's online operations, grew revenue by 17.5%, having delivered 23.1% growth in FY15.  EBITDA increased by 46.7% to £4.1m (FY15: £2.8m).  Over the last two years, Getting Personal has therefore grown revenue by 44.6% and EBITDA by 145.8% - an excellent performance.  We continue to target double digit revenue growth at Getting Personal albeit we expect this to be at a lower level than that achieved in the past two years given these much tougher comparatives.

The new Card Factory transactional website continues to progress well, having been relaunched during the year on the responsive technology platform developed by the team at Getting Personal.  We continue to enhance, test and evolve our online proposition and product offering and, in the second half of the year, introduced a wider selection of personalised cards and gifts, including a small range of photo upload products.  Whilst this initial trial range is much smaller than that of more established online competitors, our new offering of personalised cards and gifts has been well received by customers.  Taken together with a more user friendly website, this contributed to annual revenue growth of approximately 500% to £1.0m (FY15: £0.17m), despite very limited marketing support.  We have now started to increase the promotion of this new online offering in Card Factory stores and whilst annual revenue remains small relative to the size of the Group, with over 100 million in-store customer transactions each year and a loyal customer base, we are optimistic that this channel has significant growth potential over the medium term.

Management and employees

As announced in January, Karen Hubbard has been appointed as my successor and we welcome her to the Group.  Karen and I have worked closely together over recent weeks as part of a managed transition plan.  I am confident that I leave the Group in good hands.

We have also continued to invest in the wider team with some newly created roles at more senior levels in existing functions (for example, Head of Loss Prevention and a Marketing Director at Getting Personal). 

We will continue to strengthen all aspects of the business and invest in the wider team in support of our medium term growth plans.

Summary and outlook

As I enter the final few weeks of my tenure as CEO, it is pleasing to be able to announce another set of record results.  We remain confident in the Group's future prospects, and in its ability to continue to grow sales profitably over the medium term.  Our clear value proposition, underpinned by our unique vertically integrated model, remains highly differentiated and I believe that our retail offering and market position will be further strengthened in the years ahead. 

I am fortunate to have had the opportunity to lead Card Factory through an exciting period of growth and change.  It is a very strong business, with a great team of experienced people at Executive level and right across the business, and I know they will give Karen every support as she takes the business further forward.  I wish them all the very best for the future.

Finally, I would again like to thank my Board colleagues, management team and all our employees for their support and commitment over many years; and also Dean and Janet Hoyle, the founders of the business, who entrusted me with the leadership of their then family business in 2008.  Together we have all contributed to growing Card Factory from a small chain of discount stores to a vertically integrated high margin value retailer with over 800 stores nationwide and two transactional websites.

We should all be proud of what we have achieved together over a number of years in building Card Factory to the position of clear market leader - proud but not complacent.

Richard Hayes

Chief Executive Officer

4 April 2016

CHIEF FINANCIAL OFFICER'S REVIEW

The "FY16" accounting period refers to the year ended 31 January 2016 and the comparative period "FY15" refers to the year ended 31 January 2015.

Revenue

Total group revenue during the year grew by 8.0% to £381.6m (FY15: £353.3m), a similar growth rate to the prior year, with both of the Group's businesses contributing to this increase:

	FY16 £'m	FY15 £'m		Increase
Card Factory	363.4	337.8		7.6%
Getting Personal	18.2	15.5		17.5%
Group	381.6	353.3		8.0%

Strong growth in like-for-like ("LFL") sales was delivered across all retail channels:

	FY16	FY15
Card Factory stores	+2.8%	+1.8%
Card Factory online	+497.7%	+84.0%
Card Factory combined	+3.0%	+1.8%
Getting Personal	+17.5%	+23.1%
Total online combined	+22.8%	+23.5%

Single cards, Christmas boxed cards and non-card products all contributed to the like-for-like sales growth in Card Factory stores, with a particularly strong performance in non-card as a number of new ranges were introduced into store.  As a consequence, there was a continuation of the marginal mix shift to non-card, the full year mix being 56.4% single cards (FY15: 57.9%), 41.3% non-card (FY15: 39.9%) and 2.3% Christmas Box Cards (FY15: 2.2%).  We expect this trend to continue as we further improve our non-card offering.

Revenue from the new, reinvigorated Card Factory transactional website grew by approximately 500% from less than £0.2m in FY15 to £1m in FY16. 

Getting Personal revenue growth was particularly strong in the first half, as a number of prior year strategic initiatives continued to bear fruit.  As expected, revenue growth in the second half, whilst still strong and double digit, was lower than the first half given the much tougher comparatives in that period.

A total of 50 net new stores were added during the year (FY15: 51).

Operating costs

Cost of sales and operating expenses continued to be well controlled and can be analysed as follows:

	FY16			FY15			Increase
	£'m	% of revenue		£'m	% of revenue
Cost of goods sold	120.1	31.5%		110.3	31.2%		8.9%
Store wages	62.2	16.3%		57.3	16.2%		8.6%
Store property costs	60.3	15.8%		56.7	16.1%		6.2%
Other direct expenses	16.6	4.3%		15.7	4.4%		6.4%
Cost of sales	259.2	67.9%		240.0	67.9%		8.0%
Operating expenses*	27.4	7.2%		25.1	7.1%		9.1%

            *excluding depreciation and amortisation

The overall ratio of cost of sales to revenue remained flat at 67.9% on an underlying basis (FY15: 67.9%) with the following movements in sub-categories:

-       Cost of goods sold: principally comprises cost of raw materials, production costs, finished goods purchased from third party suppliers, import duty, freight costs, carriage costs and warehouse wages.  The small increase in this cost ratio, as also seen in the first half of the year, principally reflects foreign exchange movements, the ongoing shift in sales mix to lower margin Card Factory non-card product and the strong LFL performance at Getting Personal, offset in part by improvements in underlying product margins.  As highlighted previously and discussed in more detail below, foreign exchange margin pressure remains an area of concern for FY17 given the recent significant depreciation of Sterling versus the US Dollar. 

-       Store wages: includes wages and salaries (including bonuses) for store based staff, together with National Insurance, pension contributions, overtime, holiday and sick pay.  This cost increased as new stores opened but remained broadly flat as a ratio of revenue.  As highlighted in the interim results, the new National Living Wage ("NLW") will place pressure on this cost ratio in FY17 and beyond.  We estimate that, in each year over the next five years, the implementation of NLW will increase store wages by approximately £2.5m per annum (based on the current store estate), over and above the cost increase we were anticipating from the National Minimum Wage.  We have identified initiatives to mitigate approximately £1m of the FY17 increase and we are targeting a similar level of mitigation in future years.  Subject to LFL sales growth, we therefore anticipate a small annual increase in this cost ratio over the medium term.

-       Store property costs:  consists principally of store rents (net of rental incentives), business rates and service charges.  This cost has also increased in absolute terms as new stores have been opened but has reduced slightly as a ratio of revenue.  A number of the Group's existing stores remain on leases taken out before the recession when the property market was stronger and the company's covenant was weaker.  The improvement in this cost ratio reflects changes to these factors for both new stores and breaks and expiries on existing leases as well as the impact of positive LFL sales.  We believe that there remains an opportunity for further savings as these older leases come up for renewal over the coming years.

-       Other direct expenses: includes store opening costs, store utility costs, waste disposal, store maintenance, point of sale costs and marketing costs.  This cost category is largely variable in respect of existing stores and increases with new store openings.  The ratio of other direct expenses to revenue has improved marginally to 4.3% from 4.4% as a result of economies of scale and various business efficiency initiatives.

Operating expenses (excluding depreciation and amortisation) include items such as head office remuneration, costs relating to regional and area managers, design studio costs and insurance together with other central overheads and administration costs.  The Group has continued to invest in central infrastructure and people in recent years to support the ongoing planned growth; we expect this trend to continue. 

Total operating expenses (excluding depreciation and amortisation) increased by 9.1% to £27.4m (FY15: £25.1m).  Following our IPO in May 2014, this cost category has included the incremental operating costs incurred as a result of being a public company, including the non-cash share based payment charge in relation to LTIPs (introduced on IPO) and the new SAYE scheme (introduced during FY16).  The total share based payment charge for the year, including NI, was £1.6m (FY15: £0.6m).  Given the 3 year vesting period of such schemes, this non-cash share based payment charge is expected to increase in FY17, the third year to which these charges have applied following our IPO in May 2014.

Depreciation and amortisation increased from £8.8m to £9.7m reflecting the continuing capital investment in the Group.

Foreign exchange

With slightly over half of the Group's annual cost of goods sold expense relating to products sourced in US Dollars, the Group takes a prudent but flexible approach to hedging the risk of exchange rate fluctuations. 

The Group's Treasury Policy is formally approved by the Board and reviewed regularly.  The current policy requires forward cover to be in place for at least 50% of the next 12 months US Dollar requirement, calculated on a rolling basis.  The policy permits a maximum of 40% of each financial year's anticipated total requirement to be hedged via structured options, with the balance typically being hedged via vanilla forwards.  The Group has used structured options and similar instruments to good effect for a number of years.  The Board views such instruments, structured appropriately, to be commercially attractive as part of a balanced portfolio approach to exchange rate management, even if from a technical accounting perspective, they may not be deemed to meet the IFRS hedge effectiveness test. 

At the date of this announcement, cover is in place for 68% of the anticipated FY17 US Dollar cash requirement (assuming all structured options are exercisable, which would be the case with Sterling above $1.3425) at an average rate in line with our standard budget rate of $1.60 but marginally below that achieved in FY16.  As Sterling currently remains significantly below levels achieved historically, we expect foreign exchange margin pressure to remain an area of concern for FY17 and possibly beyond, with particular uncertainty arising from the debate around and potential outcome of the EU referendum.

Underlying EBITDA and Operating Profit

The underlying EBITDA margin of the Group remained broadly flat at 24.9% (FY15: 25.0%), reflecting incremental operating costs incurred following the May 2014 flotation, principally share based payment charges, offset by the benefits of business efficiencies.  Excluding share based payment charges, underlying EBITDA margins improved slightly. 

Both of the Group's retail brands, Card Factory and Getting Personal, performed well, with the EBITDA margin of Getting Personal improving considerably with increasing economies of scale:

	FY16 £'m	FY15 £'m		Increase/ (Decrease)
Underlying EBITDA
Card Factory	90.9	85.4		+6.4%
Getting Personal	4.1	2.8		+46.7%
Group	95.0	88.2		+7.7%
Underlying EBITDA margin
Card Factory	25.0%	25.3%		-0.3ppts
Getting Personal	22.4%	18.0%		+4.4ppts
Group	24.9%	25.0%		-0.1ppts

The Group's underlying operating margin was also broadly flat at 22.4% (FY15: 22.5%), despite the higher depreciation charge referred to above.   Excluding share based payment charges, underlying operating margins improved slightly. 

Looking forward to FY17, we anticipate that our margins will be adversely impacted by the aforementioned cost headwinds, together with the anticipated increase in share based payment charges relating to subsequent LTIP awards and the proposed 2016 SAYE scheme.  A number of business efficiency initiatives are underway and we will continue to pursue other business efficiency projects and cost mitigation initiatives where appropriate.  Given the best-in-class margins generated by our unique vertically integrated model, compared to our principal competitors we believe that the impact on our overall margins will be relatively low.

Debt refinancing

As announced in our interim results in September, in anticipation of the special dividend paid to shareholders in November, we amended and extended our existing £200m debt facility.  This facility, put in place prior to IPO last year, consisted of a 5 year, £180m senior debt facility and a £20m revolving credit facility ("RCF").  The new 5 year facility agreement consists of a £200m RCF, thereby providing greater flexibility and balance sheet efficiency.  The new facility also includes an additional £100m accordion.  As part of this refinancing process, the margin payable under the new facility has reduced by between 0.25% and 0.75%, depending on the leverage within the Group. 

The fees and expenses of this debt refinancing, which totalled £1.0m, have been capitalised and will be amortised to the Income Statement over the five year term of the new RCF in accordance with accounting standards.  Debt costs capitalised in relation to the previous senior debt facility of £1.8m have been written off as a non-underlying item. 

The new RCF is subject to a margin ratchet dependent upon leverage levels, with margins ranging between 1.00% (up to 1.25 times historic EBITDA) and 2.00% (at 2.0 times historic EBITDA and above), with additional intermediate steps in margin within this leverage range. 

Net financing expense

Net financing expense, excluding non-underlying items relating to the aforementioned debt refinancing, decreased by 76.1% to £3.3m (FY15: £13.9m).  The prior year included approximately four months with the pre-IPO capital structure with higher levels of leverage, a significant proportion of accrued loan note interest and a higher weighted average interest cost.  The FY16 expense also benefited from the debt refinancing completed in June.

Profit before tax

Underlying profit before tax for the financial year amounted to £82.0m (FY15: £65.5m), an increase of 25.2%.

As reported previously, as a consequence of the IPO and refinancing completed during FY15, statutory profit before tax for that year differed materially from the underlying results.  The table below reconciles underlying profit before tax to the statutory profit before tax for both financial years:

	FY16 £'m	FY15 £'m
Underlying profit before tax	82.0	65.5
Gains/(losses) on derivatives not designated as a hedge	3.8	(0.1)
IPO costs	-	(3.8)
Residual management equity share based payment	-	(11.2)
Refinanced debt issue cost amortisation	(1.8)	(7.7)
Other	(0.3)	-
Statutory profit before tax	83.7	42.7

Further detail on the non-underlying reconciling items is set out in Note 1 of the attached preliminary results.

Tax

The tax charge for the year was 20.7% of profit before tax, compared with 22.3% in the prior year.  This reflects the reduction in the headline rate of corporation tax from 21.3% to 20.2% and the treatment of certain non-recurring IPO costs in FY15.

Earnings per share

Basic and diluted underlying earnings per share for the year was 19.1p (FY15: 16.3p), an increase of 17.2%.  After the non-underlying items described above, basic and diluted underlying earnings per share for the year was 19.5p (FY15: 10.6p), an increase of 84.0%.

Capital expenditure

Capital expenditure in the year amounted to £11.6m (FY15: £10.1m) of which £2.4m (FY15: £2.6m) related to the EPOS conversion project. 

The Board anticipates that, in the coming year, total capital expenditure will amount to approximately £12m in line with previous guidance.

Strong financial position

The Group remains highly cash generative, driven by its strong operating margins, limited working capital absorption and the relatively low capital expenditure requirements of its expansion programme.

Cash conversion, calculated as operating cashflow (being underlying EBITDA less capex and underlying working capital movements) divided by underlying EBITDA remained strong at 81.2% (FY15: 89.8%).   The slight decrease from prior year reflects marginally higher capex and inventory increases from a combination of new store openings, higher Christmas carry over and the timing of purchases given the earlier Mother's Day in 2016.

As at 31 January 2016, net debt (excluding debt issue costs of £0.9m) amounted to £123.8m, analysed as follows:

	FY16 £'m	FY15 £'m
Borrowings
Current liabilities	0.1	14.5
Non-current liabilities	134.1	155.9
Total borrowings	134.2	170.4
Add: debt costs capitalised	0.9	2.2
Gross debt	135.1	172.6
Less cash	(11.3)	(69.0)
Net debt	123.8	103.6

Net debt at the year end represented 1.30 times underlying EBITDA (FY15: 1.17x), the increase in part reflecting the payment of ordinary and special dividends totaling £82.8m, as detailed below.

Dividends and capital structure

As stated at the time of the IPO, we expect to maintain a progressive dividend policy which reflects the Company's strong earnings potential and cash generative characteristics, while allowing us to retain sufficient capital to fund ongoing operating requirements and invest in the Company's long term growth plans. 

For the year ended 31 January 2016, the Board is recommending an increase in the final ordinary dividend of 33.3% to 6.0p per share (FY15: 4.5p), giving a total ordinary dividend for the year of 8.5p per share, an increase of 25.0% (FY15: 6.8p) and dividend cover of 2.25 times underlying earnings per share.

The final dividend will, subject to shareholders' approval at the Company's Annual General Meeting on 24 May 2016, be paid on 10 June to shareholders on the register on 6 May.

As previously announced, over the medium term the Board expects to maintain leverage broadly in the range of 1.0 to 2.0 times net debt to underlying historic LTM EBITDA.  Whilst this leverage ratio will typically vary during the financial year, the Board's current intention is to maintain average leverage around the mid point of this range. 

To the extent there is surplus cash within the business, the Board expects to return this to shareholders. The Board will consider the most appropriate method of returning such surplus cash from time to time, taking into account, amongst other things, views of shareholders and the liquidity of the shares. 

In line with this strategy, a special dividend of 15.0 pence per share, equating to a return of £51.1m, was paid to shareholders in November.  We believe that there is significant potential for further returns of surplus cash to shareholders in line with our stated policy.

Darren Bryant

Chief Financial Officer

4 April 2016

Consolidated income statement

For the year ended 31 January 2016

			2016				2015
		Underlying	Non-underlying (note 1)	Total		Underlying	Non-underlying (note 1)	Total
	Note	£'m	£'m	£'m		£'m	£'m	£'m
Revenue		381.6	-	381.6		353.3	-	353.3
Cost of sales		(259.2)	3.9	(255.3)		(240.0)	(0.1)	(240.1)
Gross profit/(loss)		122.4	3.9	126.3		113.3	(0.1)	113.2
Operating expenses		(37.1)	(0.3)	(37.4)		(33.9)	(15.0)	(48.9)
Operating profit/(loss)	3	85.3	3.6	88.9		79.4	(15.1)	64.3
Financial income	6	0.3	-	0.3		0.3	-	0.3
Financial expense	6	(3.6)	(1.9)	(5.5)		(14.2)	(7.7)	(21.9)
Net financing expense		(3.3)	(1.9)	(5.2)		(13.9)	(7.7)	(21.6)
Profit/(loss) before tax		82.0	1.7	83.7		65.5	(22.8)	42.7
Taxation	7	(17.0)	(0.3)	(17.3)		(14.4)	4.9	(9.5)
Profit/(loss) for the year		65.0	1.4	66.4		51.1	(17.9)	33.2
Earnings per share		pence		pence		pence		pence
- Basic and diluted	9	19.1		19.5		16.3		10.6

Consolidated statement of comprehensive income

For the year ended 31 January 2016

		2016		2015
		£'m		£'m
Profit for the year		66.4		33.2
Items that are or may be recycled subsequently into profit or loss:
Effective portion of changes in fair value of cash flow hedges		0.7		7.0
Net change in fair value of cash flow hedges recycled to profit or loss		(3.1)		0.2
Tax relating to components of other comprehensive income		0.5		(1.4)
Other comprehensive (expense)/income for the period, net of income tax		(1.9)		5.8
Total comprehensive income for the period attributable to equity shareholders of the parent		64.5		39.0

Consolidated statement of financial position             

As at 31 January 2016

		2016		2015
		£'m		£'m
Non-current assets
Intangible assets		331.0		331.0
Property, plant and equipment		39.9		38.2
Deferred tax assets		0.2		0.2
Other receivables		1.0		1.2
Derivative financial instruments		1.8		-
		373.9		370.6
Current assets
Inventories		50.4		41.5
Trade and other receivables		17.0		17.7
Derivative financial instruments		3.5		5.8
Cash and cash equivalents		11.3		69.0
		82.2		134.0
Total assets		456.1		504.6
Current liabilities
Borrowings		(0.1)		(14.5)
Trade and other payables		(35.8)		(35.3)
Tax payable		(8.8)		(5.2)
Derivative financial instruments		(0.2)		(0.1)
		(44.9)		(55.1)
Non-current liabilities
Borrowings		(134.1)		(155.9)
Trade and other payables		(11.4)		(10.7)
		(145.5)		(166.6)
Total liabilities		(190.4)		(221.7)
Net assets		265.7		282.9
Equity
Share capital		3.4		3.4
Share premium		201.6		201.6
Hedging reserve		3.1		5.0
Reverse acquisition reserve		(0.5)		(0.5)
Merger reserve		2.7		2.7
Retained earnings		55.4		70.7
Equity attributable to equity holders of the parent		265.7		282.9

Consolidated statement of changes in equity           

For the year ended 31 January 2016

	Share capital	Share premium	Hedging reserve	Reverse acquisition reserve	Merger reserve	Retained earnings	Total equity
	£'m	£'m	£'m	£'m	£'m	£'m	£'m
At 1 February 2014	2.5	-	(0.8)	(0.5)	2.7	27.2	31.1
Total comprehensive income for the year
Profit or loss	-	-	-	-	-	33.2	33.2
Other comprehensive income	-	-	5.8	-	-	-	5.8
	-	-	5.8	-	-	33.2	39.0
Transactions with owners, recorded directly in equity
Issue of shares - net of issue costs	0.9	201.6	-	-	-	-	202.5
Share based payment charges	-	-	-	-	-	10.3	10.3
Total contributions by and distributions to owners	0.9	201.6	-	-	-	10.3	212.8
At 31 January 2015	3.4	201.6	5.0	(0.5)	2.7	70.7	282.9
Total comprehensive income for the year
Profit or loss	-	-	-	-	-	66.4	66.4
Other comprehensive income	-	-	(1.9)	-	-	-	(1.9)
	-	-	(1.9)	-	-	66.4	64.5
Transactions with owners, recorded directly in equity
Share based payment charges	-	-	-	-	-	1.3	1.3
Taxation on share based payments recognised in equity	-	-	-	-	-	0.1	0.1
Dividends (note 8)	-	-	-	-	-	(83.1)	(83.1)
Total contributions by and distributions to owners	-	-	-	-	-	(81.7)	(81.7)
At 31 January 2016	3.4	201.6	3.1	(0.5)	2.7	55.4	265.7

Consolidated cash flow statement

For the year ended 31 January 2016

	Note	2016		2015
		£'m		£'m
Cash inflow from operating activities	10	92.2		84.9
Corporation tax paid		(13.0)		(9.6)
Net cash inflow from operating activities		79.2		75.3
Cash flows from investing activities
Purchase of property, plant and equipment		(10.5)		(9.2)
Purchase of intangible assets		(1.1)		(0.9)
Payment of deferred consideration		(0.8)		(0.8)
Proceeds from sale of property, plant and equipment		0.1		-
Interest received		0.3		0.3
Net cash outflow from investing activities		(12.0)		(10.6)
Cash flows from financing activities
Proceeds from bank borrowings		144.2		177.4
Purchase of interest rate caps		(0.5)		-
Interest paid		(3.3)		(8.6)
Repayment of borrowings		(182.5)		(293.6)
Payment of finance lease liabilities		-		(0.1)
Proceeds from new shares issued		-		88.5
Dividends paid		(82.8)		-
Net cash outflow from financing activities		(124.9)		(36.4)
Net (decrease)/increase in cash and cash equivalents		(57.7)		28.3
Cash and cash equivalents at the beginning of the year		69.0		40.7
Closing cash and cash equivalents		11.3		69.0

Notes to the financial statements

General information

Card Factory plc ('the Company') is a public limited company incorporated in the United Kingdom. The Company is domiciled in the United Kingdom and its registered office is Century House, Brunel Road, 41 Industrial Estate, Wakefield WF2 0XG.

The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the 'Group').

Basis of preparation

The Group financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU ('EU IFRS') and with those parts of the Companies Act 2006 applicable to companies reporting under EU IFRS.

The financial statements have been prepared on a going concern basis under the historical cost convention, as modified for the subsequent measurement of derivative financial instruments.

Impact of the Group restructure prior to the Initial Public Offering

On 20 May 2014, Card Factory plc was admitted to trading on the London Stock Exchange. In preparation for the Initial Public Offering, the Group was restructured. On 30 April 2014 Card Factory plc (formerly CF Listco Limited, incorporated on 17 April 2014 for the purpose of the restructure) acquired 100% of the share capital of CF Topco Limited in a share for share exchange, thereby inserting Card Factory plc as the Parent Company of the Group. The shareholders of CF Topco Limited became 100% owners of the enlarged share capital of Card Factory plc.

The principles of reverse acquisition accounting under IFRS 3 "Business Combinations" have been applied to the comparative period ended 31 January 2015. By applying the principles of reverse acquisition accounting, the comparative period is presented as if Card Factory plc had always owned CF Topco Limited.

Full details of the reverse acquisition accounting applied were described in the financial statements for the year ended 31 January 2015.

Underlying profit and earnings

The Group has chosen to present an underlying profit and earnings measure. The Group believes that underlying profit and earnings provides additional useful information for shareholders. Underlying earnings is not a recognised profit measure under EU IFRS and may not be directly comparable with 'adjusted' profit measures reported by other companies. The reported non-underlying adjustments are as follows:

Net fair value remeasurement gains and losses on derivative financial instruments

The Group utilises foreign currency derivative contracts to manage the foreign exchange risk on US Dollar denominated purchases and interest rate derivative contracts to manage the risk on floating interest rate bank borrowings. Fair value gains and losses on such instruments are recognised in the income statement to the extent they are not hedge accounted under IAS 39. Such gains and losses relate to future cash flows. In accordance with the commercial reasoning for entering into the agreements, these gains/losses are deemed not representative of the underlying financial performance in the year and presented as non-underlying items. Any gains or losses on maturity of such instruments are presented within underlying profit to the extent the gain or loss is not recognised in the hedging reserve.

IPO costs

In May 2014, Card Factory plc floated on the London Stock Exchange. Non-recurring IPO related costs in the prior year totalled £5.3 million of which £3.8 million was charged to the income statement and £1.5 million was recognised within share premium as costs directly related to the issue of new shares.

Residual management equity share based payment

On admission to the London Stock Exchange, shares with a fair value of £9.8 million were issued at nominal value in relation to residual management equity as detailed in the IPO prospectus. Employer national insurance of £1.4 million was incurred on the issue of the shares. These non-recurring share based payments are presented as a non-underlying item in the prior year income statement.

Other non-underlying operating expenses

In January 2016, Card Factory plc announced the retirement and succession of the Chief Executive Officer. Costs attributable to the recruitment of the new CEO are presented as a non-underlying item.

Refinanced debt issue cost amortisation

Debt issue costs totalling £1.8 million were expensed to the income statement in the period on completion of an amended and extended borrowing facility on 26 June 2015. This expense relates to costs that were not yet amortised in relation to the 30 May 2014 refinancing and is presented as a non-underlying item.

Loan issue costs totalling £7.7 million were expensed to the income statement in the year ended 31 January 2015 on the repayment and refinancing of previous borrowing facilities on 30 May 2014. This expense relates to costs that were not yet amortised in relation to a previous borrowing facility and is presented as a non-underlying item in the prior year.

1          Non-underlying items

	2016		2015
	£'m		£'m
Cost of sales
Profit/(loss) on foreign currency derivative financial instruments not designated as a hedge	3.9		(0.1)
Operating expenses
IPO costs	-		(3.8)
Residual management equity share based payment	-		(11.2)
Other non-underlying operating expenses	(0.3)		-
	(0.3)		(15.0)
Net finance expense
Refinanced debt issue cost amortisation (note 6)	(1.8)		(7.7)
Loss on interest rate derivative financial instruments not designated as a hedge	(0.1)		-
	(1.9)		(7.7)

2          Segmental reporting

The Group has two operating segments trading under the names Card Factory and Getting Personal. Card Factory retails greeting cards, dressing and gifts in the UK through an extensive store network. Getting Personal is an online retailer of personalised cards and gifts. Getting Personal does not meet the quantitative thresholds of a reportable segment as defined in IFRS 8. Consequently the results of the Group are presented as a single reportable segment. Revenues outside of the UK are not significant at less than £0.1million.

The Chief Operating Decision Maker is the Board of Directors. Internal management reports are reviewed by the Board of Directors on a monthly basis. Performance of segments is assessed based on a number of financial and non-financial KPIs including EBITDA (as defined in note 4) and profit before tax.

3          Operating profit

Operating profit is stated after charging/(crediting) the following items:

	2016		2015
	£'m		£'m
Staff costs (note 5)	91.1		95.0
Depreciation expense
- owned fixed assets	8.6		7.7
Amortisation expense	1.1		1.1
Operating lease rentals:
- land and buildings	36.0		34.6
- plant, equipment and vehicles	0.4		0.5
Loss on disposal of fixed assets	0.1		-
Foreign exchange gain	(4.0)		-

4          Underlying EBITDA

Underlying earnings before interest, tax, depreciation and amortisation ('EBITDA') represents underlying profit for the period before net finance expense, taxation, depreciation and amortisation.

	2016		2015
	£'m		£'m
Underlying operating profit	85.3		79.4
Depreciation and amortisation	9.7		8.8
Underlying EBITDA	95.0		88.2

5          Staff numbers and costs

The average number of people employed by the Group (including Directors) during the year, analysed by category, was as follows:

	2016		2015
	Number		Number
Management and administration	321		289
Operations	9,220		8,908
	9,541		9,197

The aggregate payroll costs of all employees including Directors were as follows:

	2016		2015
	£'m		£'m
Employee wages and salaries	81.1		76.4
Equity-settled share based payment expense	1.3		10.3
Social security costs	4.5		5.4
Defined contribution pension costs	0.3		0.3
Total employee costs	87.2		92.4
Agency labour costs	3.9		2.6
Total staff costs	91.1		95.0

6              Finance income and expense

	2016		2015
	£'m		£'m
Finance income
Bank interest received	(0.3)		(0.3)
Finance expense
Interest on bank loans and overdrafts	3.3		8.5
Amortisation of loan issue costs	2.1		9.0
Interest on loan notes	-		4.3
Fair value loss on interest rate derivative contracts	0.1		-
Interest on deferred consideration	-		0.1
	5.5		21.9
Net finance expense	5.2		21.6

Amortisation of loan issue costs include £1.8 million (2015: £7.7 million)  in relation to previous loan facilities, expensed to the income statement on replacement with a new facility and presented as non-underlying, see note 1.

7          Taxation

Recognised in the income statement

	2016		2015
	£'m		£'m
Current tax expense
Current year	16.8		10.6
Adjustments in respect of prior periods	(0.1)		(0.7)
	16.7		9.9
Deferred tax credit
Origination and reversal of temporary differences	0.5		(0.5)
Adjustments in respect of prior periods	0.1		0.1
	0.6		(0.4)
Total income tax expense	17.3		9.5

The effective tax rate of 20.7% (2015: 22.3%) is higher than the standard rate of corporation tax in the UK. The tax charge is reconciled to the standard rate of UK corporation tax as follows:

	2016		2015
	£'m		£'m
Profit before tax	83.7		42.7
Tax at the standard UK corporation tax rate of 20.16% (2015: 21.32%)	16.9		9.1
Tax effects of:
Expenses not deductible for tax purposes	0.4		1.1
Non-taxable income	-		(0.1)
Adjustments in respect of prior periods	-		(0.6)
Total income tax expense	17.3		9.5

8          Dividends

The Board is recommending a final dividend in respect of the financial year ended 31 January 2016 of 6.0 pence per share (2015: 4.5 pence per share), resulting in a total final dividend of £20.4 million (2015: £15.4 million). The dividend will, subject to shareholders' approval at the Annual General Meeting on 24 May 2016, be paid on 10 June 2016 to shareholders on the register at the close of business on 6 May 2015. No liability is recorded in the financial statements in respect of this final dividend as it was not approved at the balance sheet date.

Dividends paid in the year:	Pence per share			2016		2015
				£'m		£'m
Special dividend for the year ended 31 January 2016	15.0p			51.1		-
Interim dividend for the year ended 31 January 2016	2.5p			8.5		-
Final dividend for the year ended 31 January 2015	4.5p			15.4		-
Interim dividend for the year ended 31 January 2015	2.3p			7.8		-
				82.8

Dividends totalling £82.8 million were paid in the year with a further £0.3m accrued in relation to share based long term incentive schemes.

9          Earnings per share

Basic earnings per share is calculated by dividing the profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period.

Diluted earnings per share is based on the weighted average number of shares in issue for the period, adjusted for the dilutive effect of potential ordinary shares. Potential ordinary shares represent employee share incentive awards and save as you earn share options.

The Group has chosen to present an alternative earnings per share measure, with profit adjusted for non-underlying items to reflect the Group's underlying profit for the year. Underlying earnings is not a recognised profit measure under IFRS and may not be directly comparable with 'adjusted' profit measures used by other companies.

	2016		2015
	(Number)		(Number)
Weighted average number of shares in issue	340,696,235		312,568,527
Weighted average number of dilutive share options	478,006		15,919
Weighted average number of shares for diluted earnings per share	341,174,241		312,584,446

	£'m		£'m
Profit for the financial year	66.4		33.2
Non-underlying items	(1.4)		17.9
Total underlying profit for underlying earnings per share	65.0		51.1

	pence		pence
Basic earnings per share	19.5		10.6
Diluted earnings per share	19.5		10.6
Underlying basic earnings per share	19.1		16.3
Underlying diluted earnings per share	19.1		16.3

10        Notes to the cash flow statement

Reconciliation of operating profit to cash generated from operations

	2016		2015
	£'m		£'m
Profit before tax	83.7		42.7
Net finance expense	5.2		21.6
Operating profit	88.9		64.3
Adjusted for:
Depreciation and amortisation	9.7		8.8
Loss on disposal of fixed assets	0.1		-
Cash flow hedging foreign currency gains	2.4		0.4
Share based payments charge	1.3		10.3
Operating cash flows before changes in working capital	102.4		83.8
(Increase)/decrease in receivables	(3.0)		0.7
Increase in inventories	(8.9)		(2.2)
Increase in payables	1.7		2.6
Cash inflow from operating activities	92.2		84.9

 

END

 

 

FR EAXLLELSKEFF