Analysis: How would investors greet a Card Factory float?

Card Factory, which has instructed Goldman Sachs to explore a float, has undoubtedly been one of the big retail success stories over the past five years.

It was a big disrupter for the greetings card sector, of which it is now the clear market leader. Helped by its vertically integrated supply chain, the retailer’s sharp price points usurped Clintons from its greetings card throne and has created a thriving value market in the sector.

Building on its success, Card Factory has more than doubled its store estate in the past six years from 280 in 2007 to 650 as of late last year.

Therein lies Card Factory’s big problem - it has already capitalised on the opportunity and therefore may have left it too late to get the most from a float.

“With 600 stores, it’s difficult to see where the growth is going to come from in the future. Investors want growth stock and Card Factory feels like a mature stock now,” says Peel Hunt analyst John Stevenson.

Card Factory is also not operating in a growth market. The UK greetings card market value remained static last year at £1.38bn, according to the Greeting Card Association and competition is fierce for specialists like Card Factory with not only the grocers, but retailers selling everything from fashion to books, stocking cards.

Moreover, market forces are not in the retailer’s favour. Although Card Factory’s prices are hard to beat, Royal Mail’s ever-increasingly stamp prices are likely to further deter consumers from sending cards. At 60p for a first class stamp, it is more expensive to post a card than buy it at Card Factory.

Rising delivery charges may be playing a part in why the online message and e-cards market is growing. In fact, Stevenson says that Moonpig or Funky Pigeon, owned by WH Smith, would get a better reception from the City if they came to the stock market.

Card Factory has jumped on the online bandwagon, snapping up GettingPersonal.co.uk in 2011. However, the website accounts for a small portion of Card Factory’s sales and may not offer enough growth prospects to woo would-be investors.

The lacklustre response from potential buyers for the retailer when Goldman put out the feelers last year does not bode well, according to Stevenson. It is understood that the adviser, which is still pursuing a sale, is offering a £500m loan to prospective bidders to boost interest.

“The City would have loved companies like Wiggle or Pets at Home but private equity was willing to pay more. There doesn’t seem to be much demand out there for Card Factory,” says Stevenson.

The retailer may well have been a victim of its own success, and its ability to capitalise rapidly on its growth prospects may have already sunk its potential float.