Yesterday, Card Factory (LSE: CARD) was one of the best performers on the London Stock Exchange. When the market closed at 4.30pm, shares in the card and gift retailer were up 33%.
So what was behind this huge share price surge? And, more importantly, is now the time to buy this stock for my portfolio?
Why Card Factory’s share price just spiked
The reason the share price jumped yesterday was that the company announced it had agreed terms of a refinancing with its current banking partners.
This is a big deal for the retailer, as Card Factory has carried quite a lot of debt on its balance sheet in recent years and it has been unclear as to how it will manage this debt.
Some investors thought the company may have to raise money through an equity raise. This scenario would have been bad for existing shareholders as it would have diluted their holdings, and resulted in a share price fall.
Under the terms of the refinancing deal, Card Factory will have a £100m revolving credit facility (RCF) available until September 2025. It will also have some smaller loan term facilities that need to be repaid between early 2023 and 2025. This should provide financial support for the business and eliminate the need for an equity raise.
Overall, this is a positive development and good news for shareholders. Ultimately, a big risk here has just been removed and that’s reflected in the share price spike.
Should I buy Card Factory shares now?
As for whether I’d buy Card Factory shares today, I’m not convinced the risk/reward proposition is attractive right now.
One thing that concerns me here is inflationary pressure. In January, the company said rising costs will not be fully mitigated by pricing actions, resulting in lower FY2023 profit than previously anticipated. I expect the higher costs to persist for a while.
It’s worth noting that Card Factory has a low gross profit margin (28% last year). Businesses with low gross margins can see their profits fall significantly when inflation is high.
Related to this is consumer spending power. Right now, a lot of UK consumers are really feeling the pinch due to high energy costs. Companies such as Card Factory, which sell non-essential goods, could be impacted negatively if consumers cut back on spending.
I also have concerns in relation to the long-term growth potential here. According to ResearchandMarkets, the global greetings card market is projected to decline in size by about 2% per year between now and 2026. With the market going backwards, Card Factory is going to have its work cut out to generate growth.
Additionally, there won’t be any dividends here for a while. Under the terms of its loan agreements, the company is not allowed to pay dividends in the near term.
So while the refinancing news is definitely positive, I won’t be buying Card Factory shares for my portfolio. In today’s inflationary environment, I think there are better shares to buy.