Across the group, like-for-like sales growth has been driven primarily by lower margin non-card categories, such as gifts and dressings, with card sales stable year-on-year, as a result of which profits will be down year-on-year in fiscal 2018 (FY18).
The company said it expects underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for the year to the end of January will be within the range of £93mln and £95mln, down from £98.5mln the year before.
The retailer added it continues to see pressure on its margins, though it remains highly cash generative.
Sales in the first 11 months of the current financial year were 5.9% higher than in the same period of the previous year.
Like-for-like (LFL) sales growth of 2.7% was an improvement on the corresponding period of 2016, when LFL sales were up 0.4%, with a “solid performance” over Christmas.
The online offering continues to grow strongly, albeit from a low base, and including e-commerce into the LFL sales comparison would have seen the growth rate increase to 3.0% (2016: +0.5%).
"As we have reported previously, the group has faced significant cost pressures in the year; these, together with the further change in margin mix given the ongoing out-performance of lower-margin non-card categories, are reflected in our expected outturn,” said Karen Hubbard, the chief executive officer of Card Factory.
"We anticipate that the combined impact of foreign exchange and wage inflation in FY19 will result in £7-8mln of additional costs; whilst we have plans to mitigate this impact as far as possible, we recognise that against this backdrop, any EBITDA growth for the year is likely to be limited. Looking further ahead, cost headwinds should ease unless there is a further dramatic shift in sterling.
"We believe that our market leading proposition, underpinned by our unique vertically integrated model, provides our business with significant competitive advantage," she added.
Liberum cuts forecasts
Liberum Capital Markets cut its forecasts again in response to the trading update and cut its price target from 260p to 240p.
It regards Card Factory as a dividend stock, rather than a growth story, but until it gains more confidence that margins have reached the trough it will retain doubts about the company’s ability to make generous pay-outs.
It has cut its dividend forecast for the year to the end of January 2019 (and beyond) by 30% to a level where it should be covered by free cash flow.
“We have been long-term supporters of Card Factory due to its distinctive value position, which we see as resonating well with consumers. The group’s cash flow profile has been very strong resulting from fast cash paybacks on stores and a high RoCE [return on capital employed]; however, the market dynamics have been less favourable with lower footfall proving to be a headwind the past quarter and could be a theme throughout FY18E and beyond. Cost headwinds have been unkind to margins and these are likely to remain a theme for the year ahead,” the broker said.
Shares in Card Factory tumbled 50p to 232.4p following the trading update.