Investing.com -- Shares of Card Factory plc (LON:CARDC) jumped over 5% on Tuesday after it reported sales growth of around 6% year-on-year for the 11-month period ending December 2024, in line with consensus forecasts for the full year.
This comes despite facing a challenging market environment characterized by slow growth in the broader physical card sector, which is currently growing at a modest 0-1% annually.
The company’s performance, which includes a net addition of 32 stores over the year, is ahead of its long-term goal of adding around 22-23 stores annually.
Comparable store sales growth of 4% indicates that the momentum seen in the first half of the fiscal year continued into the second half, a positive sign that Card Factory is maintaining strong demand across its store network.
The Christmas trading period, traditionally a key performance driver for retailers in the sector, has proven successful for Card Factory.
The greeting card and gifts retailer has reaffirmed confidence in achieving the consensus estimates for fiscal year 2025, which project an earnings before tax range of £65-67 million.
This represents a 6% growth for the full year, based on the mid-point of the guidance.
Analysts at UBS Global Research have pointed out that this projection implies a robust margin recovery in the second half of the year, where EBT margins are expected to exceed 16.5%, a notable improvement from the around 6% margin seen in the first half.
The improvement in the second-half margin is partly attributed to several operational efficiency initiatives rolled out in the first half of the year, which will have a full-year benefit.
A key example of this is the new labour model introduced in August, which helped reduce the need for additional hires during the busy Christmas period by more than 25%.
The company has long benefited from seasonal margin uplift, typically averaging around 500 basis points from its operating expenses and fixed costs during the peak trading periods.
However, despite this positive outlook for FY-25, there are concerns about the company’s ability to maintain this growth rate in the coming fiscal year.
Card Factory has flagged a £14 million headwind from anticipated wage cost increases in FY-26, linked to changes in the national insurance minimum wage regulations set to take effect in April 2025.
Despite these rising costs, the company expects to achieve mid-to-high single-digit EBT growth year-on-year for FY-26, implying stable margins.
The guidance for FY-26, while conservative, aligns with UBS Global Research's forecast of around 7% EBT growth.
However, consensus expectations currently anticipate 11% growth for the period, and analysts at UBS suggest that the recent update from management may lead to downward revisions in FY-26 expectations.
This could put downward pressure on the stock in the short term. Nevertheless, UBS analysts believe that the market has already priced in the challenges of FY-25 and the ongoing uncertainty around labour costs, which could create an opportunity for long-term investors as the company provides more clarity moving forward.