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

Preliminary results for the year ended 31 January 2017

Another record year; 7.1% increase in total 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 2017. 

* Excludes non-underlying items, in particular costs relating to debt refinancing (FY16 only) and mark-to-market movements on derivatives not designated as a hedging relationship (see note 1 of the attached preliminary results).  See note 4 of the attached preliminary results for definition of EBITDA.

·      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

·      51 net new stores opened in the period, bringing total estate to 865 at year end

·      Strong pipeline of further new store opportunities for FY18

3.   Delivering business efficiencies

·      Industry-leading underlying EBITDA margins maintained at 24.7% (FY16: 24.9%),

·      Business efficiency initiatives underway to provide partial mitigation of margin headwinds, in particular foreign exchange and national living wage

4.   Development of complementary online sales channels

·      gettingpersonal.co.uk remains a relatively small and profitable part of the group but financial performance disappointing.  Plans in place to return to profitable growth following recruitment of a new senior team

·      Solid sales growth of c50% from cardfactory.co.uk despite strong prior year comparatives

·      Year-end leverage of 1.38 times, in lower half of the target range of 1 to 2 times underlying EBITDA.  Leverage is calculated as the ratio of net debt to underlying EBITDA for the previous 12 months.

·      Strong returns to shareholders with total ordinary dividend up 7.1% at 9.1p per share (FY16: 8.5p), and special dividend of 15.0p per share paid in November 2016

·      Further return of surplus cash currently expected to be made towards end of FY18 financial year

Karen Hubbard, Chief Executive Officer, commented:

"Having joined the Group just over a year ago, I have undertaken a detailed strategic review of the business and I am confident that our existing, proven four pillar strategy is the right one to ensure future business growth.  However, with the benefit of fresh eyes, I believe that within the four pillars there are additional opportunities to further strengthen the business for the longer term, and these will be prioritised in the year ahead. 

"Over the last year, it is that established strategy which has allowed us to deliver a good performance in a challenging retail market.  Our store LFL sales remained positive and our business continued to deliver best-in-class margins whilst remaining highly cash generative, allowing another 15p special dividend to be paid to shareholders in 2016.

"Whilst the new financial year is only two months old and seasonal sales patterns are distorted by Easter and Mother's Day falling three weeks later than last year, we are pleased with everyday like-for-like sales in the year to date.  I look forward to providing a further trading update at our AGM in May."

Preliminary results presentation

A presentation for analysts will be held today starting at 9.30am at UBS Limited, 5 Broadgate, London EC2M 2QS. Those analysts who wish to attend are requested to contact Nessyah Hart of MHP on the number below or at nessyah.hart@mhpc.com.  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)

Karen Hubbard, Chief Executive Officer

Darren Bryant, Chief Financial Officer

MHP Communications                                     +44 (0) 203 128 8100

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 850 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.   Like-for-Iike sales definitions

The Group defines Card Factory store Iike-for-Iike ("LFL") sales as the year-on-year growth in sales for Card Factory stores which have been opened for a full year, calculated on a calendar week basis.  The reported LFL sales figure excludes sales:

·      made via the Card Factory website, www.cardfactory.co.uk;

·      made via the separately branded personalised card and gift website, www.gettingpersonal.co.uk;

·      by Printcraft, the Group's printing division, to external third-party customers; and

·      from stores closed for all or part of the relevant period (or the prior year comparable period).

Card Factory stores are included in the reported LFL figures for each week of trading completed after having been open for a full 52 weeks, as compared to the same relevant week in the previous period.

Total Card Factory LFLs are reported including the impact of the Card Factory website.

The Group defines Getting Personal LFL sales as the year-on-year growth in sales for the Getting Personal website, calculated on a calendar week basis.

3.   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 2017

CHAIRMAN'S STATEMENT

Card Factory has had another good year, once again delivering a record performance in terms of both revenue and underlying profit generation.  Whilst this year marks the third anniversary of the IPO, it is also the twentieth anniversary of the company's formation.  Having started life as a local family owned discounter, the Group has developed into a high margin, national, value retailer with over 850 stores, two transactional websites and a position of clear market leadership.  During this period the Group has demonstrated an ability to grow sales and profit, increase market share and generate significant returns for shareholders.  The Board's objective is to continue to build on this strong track record in the years ahead.

The Group continues to focus on its successful four pillar strategy, underpinned by its unique vertically integrated model which provides significant competitive advantage, particularly in challenging retail environments, as seen in 2016.  In her report that accompanies these results, our Chief Executive Officer, Karen Hubbard, provides an update on the Group's current strategic priorities.  The Board is excited by the opportunities, both strategic and operational, that Karen has identified to further improve an already very successful business.

In January we announced that our Chief Financial Officer, Darren Bryant, intended to retire after eight years with the Group. Throughout this period Darren has contributed significantly to the strategic development and sustained growth of Card Factory.  As our CFO, he successfully steered the Company through its 2014 IPO and its first three years as a public company.  After such an intense period of activity we understand his wish to retire.  We are extremely grateful for all he has done and, when he steps down, it will be with our very best wishes for the future.  Darren has agreed to continue in his role until a successor has been identified and through a transitional period. The search for that successor is well advanced and a further announcement will be made in due course.

The Board has increased the total ordinary dividend for the year by 7.1% to 9.1p per share, reflecting our strong cash generation and confidence in the future prospects of the business.  This is in addition to the 15.0p per share special dividend paid in November 2016. In line with our stated capital policy, we currently expect to make further returns of surplus cash to shareholders towards the end of the current financial year.

Geoff Cooper

Chairman

CHIEF EXECUTIVE OFFICER'S REVIEW

Overview

I am pleased to report another record year at Card Factory in terms of both sales and underlying profit performance.  Throughout the year we have continued to provide a compelling offer with extensive ranges of designs across our cards, party products, dressings and gifts.  Our ranges continue to resonate well with our customers who recognise the quality and value that we offer. 

We have also strengthened and innovated our offering, adding line extensions in both card and non-card and further successful seasonal ranges.  During 2016 our Mother's Day offer saw the single highest sales day in Card Factory history.  Our store and online offering has enabled us to provide great value for our customers who see us as their retailer of choice for such important events.

Since joining, I have undertaken a detailed strategic review of the business.  Having done so, I am confident that our existing, proven four pillar strategy is the right one to ensure future business growth. 

Over the past year, it is this established strategy that allowed us to deliver a good performance in a challenging retail market.  Our LFL sales remained positive and our business continued to deliver best-in-class margins whilst remaining highly cash generative, allowing another 15p special dividend to be paid to shareholders. 

However, with the benefit of fresh eyes, I believe there are additional opportunities to further strengthen the business for the longer term.  

We are trusted to be there to help our customers celebrate their life moments and milestone events.  Our business model, with its integrated supply chain, allows us to provide an unrivalled offer to our customers.  In particular, we have the widest range of high quality cards, with innovative designs and styles, all available at compelling prices.  Together, it means that our customers can find quality cards to say exactly what they wish to say at a price that is affordable for them.

Market update

The latest independent research published by OC&C in March 2017 has confirmed that a number of important and established market trends that were highlighted at the time of our IPO in 2014 remain as valid today:

·    the market for single greeting cards is well established, robust and resilient; it continues to show modest growth in value terms and remains stable in terms of volume, supported by a growing and ageing population - this trend in volume and value is forecast to continue;

·    the sending of physical greeting cards is deeply ingrained in UK culture with high levels of emotional attachment to card purchasing;

·    there has been no meaningful shift in the use of digital greetings as a replacement for the physical card;

·    the online personalised card segment remains an attractive niche, not yet fully targeted by Card Factory;

·    Card Factory has maintained significant clear blue water versus its competitors in terms of the consumer's perception of value; and

·    Card Factory continues to grow market share in terms of both volume and value - continuing a consistent trend seen since the company's formation twenty years ago.

Strategic performance

We continue to make good progress against our four established strategic pillars:

1.   LFL sales growth

Card Factory stores delivered positive like-for-like growth in the year of +0.4% notwithstanding a tough comparative (FY16: 2.8%) and the lower levels of footfall experienced by the general retail market.  Including cardfactory.co.uk, LFL sales growth from the Card Factory fascia was +0.6% (FY16: +3.0%).  However, I believe that we can do better and it was pleasing to deliver a good Christmas trading performance with cumulative like-for-like sales growth for the fourth quarter returning to the expected historic range of +1% to +3%.

In card, we continued to focus on introducing new styles and designs, whilst maintaining our value offer - customers can still buy high quality cards at prices that are up to two-thirds lower than that charged for similar products by our principal competitors. 

In non-card, our design and buying teams developed a number of new ranges, including our successful "Pugs" range, a broader selection of wedding gifts, innovation in gift bags and boxes and new candle designs.   This design and innovation has been recognised and well received by our customers.  For the year as a whole, the proportion of sales from non-card items increased to 42.3% (FY16: 41.3%).  This in part was as a result of our EPOS system acting as an enabler to drive average transaction value to help offset downward pressure on footfall. 

Another driver of Card Factory fascia LFL growth was our website, cardfactory.co.uk.  We have made good progress with this segment of the business, as is outlined further below within my commentary on online development.

Looking forward, we intend to maximise LFL growth through: (i) ensuring we leverage our Design Studio to continue improving the designs of our card ranges and innovation in our non-card ranges; and (ii) focusing on retail disciplines, in particular ensuring improved availability, better space and merchandising planning, and a greater focus on customer service and operational standards.

2.   New store roll out

Our internal property team has enabled us to continue to open and operate new stores efficiently and in a cost effective manner and we have been successful in locations where we were previously unrepresented.

We opened 51 net new stores in FY17 across a variety of retail locations including high streets, shopping centres and retail parks, providing the opportunity for more customers to experience us in new markets.  In total we had 865 stores at the end of the financial year (31 January 2016: 814).  The quality of our estate is quite remarkable: 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.

Looking forward, we continue to have a strong pipeline of potential new stores, including a number of opportunities in retail parks, a segment of the market where we are seeking to increase our presence. We expect to add a further 50 net new stores to our estate in the current financial year.

We continue to monitor developments across our competitors and the broader retail space to ensure that we are well positioned to take advantage of property opportunities that may materialise.

I believe that there is a significant opportunity in the Republic of Ireland.  We have recently completed a number of detailed studies of the market and its dynamics; we think our offer will be seen to be very attractive to the potential customer base.  A further update will be provided at the interim results.

Across both geographies, we continue to target a cost-effective estate of 1,200 stores, across high streets, shopping centres and retail parks, capable of driving strong returns whilst maintaining the quality inherent in the Card Factory brand.

3.   Business efficiencies

The Group has consistently delivered one of the best operating profit margins in the retail sector and continuing to achieve this, whilst offering our customers value, means that we have to maintain the most efficient and lowest cost base. 

As referred to within our Chief Financial Officer's Review and previous announcements, we have for some time anticipated further significant cost pressures, in particular foreign exchange and wage rates.  Whilst our competitors are facing the same challenges, we have a competitive advantage by virtue of our vertically integrated model and resulting superior operating margins.  Our value proposition and our response to external challenges should present an opportunity to further strengthen our market position if we execute well.  We will remain conscious of our customers' sensitivity to price points, ensuring that we are delivering the right customer offer to retain and grow our market share.  

We have a defined business efficiencies programme in place to help mitigate, where possible and appropriate, the impact of our cost headwinds.  We have already started to see initial benefits of recent investment in our buying function and loss prevention team.  Our LED conversion programme is also progressing well, further reducing our cost to operate.

Looking ahead, I see further business efficiency opportunities including: lowering the cost of sales through better buying; driving lean fulfilment in stores through supply chain efficiencies; and maintaining operational productivity in stores through simplicity of operations.  We have commenced a number of initiatives focused on these areas; I will provide a more detailed report on progress in due course.

4.   Online development

We have two online sites - cardfactory.co.uk and gettingpersonal.co.uk.

We see cardfactory.co.uk as offering a Card Factory customer a compelling range of personalised cards and gifts with the same focus on quality and value as are found in our stores.  We are also evaluating options for including more non-personalised products on the site, including balloons and party products.  We believe there are growth opportunities for cardfactory.co.uk and have invested in our talent and renewed the focus on the offer to deliver profitable sales growth.  Sales growth of c50% in FY17 for cardfactory.co.uk was solid despite strong prior year comparatives (FY16: c500%).  We are aiming to maintain this positive growth in FY18 through leveraging this approach. 

We continue to have strong aspirations for gettingpersonal.co.uk, which is focused on personalised gifts.  Whilst this remains a relatively small and profitable part of the group in terms of both sales and profit contribution, its financial performance in the year was disappointing with sales down by 2.6%.  Given lower conversion rates, investment in the management structure and some one-off costs, the EBITDA performance of £2.8m (FY16: £4.1m) was below our expectations, having grown by almost 150% over the previous 24 months.

We have made some significant changes in this business during the year, including recruiting a new senior team, investing in online talent and renewing the focus on product and the customer experience.

Whilst we are early in the turnaround phase for gettingpersonal.co.uk, we are encouraged by the increased site visitors and conversion rates with customers responding positively to the innovation in new product ranges.  I am optimistic that we can make significant progress with this business in terms of both sales and profit contribution to the Group.

Looking ahead, the key focus areas across both online channels will be implementing a new and better digital marketing approach; improving the look and feel of our websites; and further innovating our personalised product ranges

Other strategic priorities

Alongside a continued focus on these four strategic pillars, my strategic review identified opportunities to further strengthen our business for all stakeholders, and to enhance future shareholder returns, with a focus on three areas - further targeted investment, greater engagement with colleagues, and listening even more to our customers.

Ongoing investment to drive shareholder value

As highlighted a year ago, in order to optimise the benefits of our existing EPOS system the Board commissioned an independent detailed review of a potential software upgrade to enable further system improvements and efficiencies to be delivered.   This review was completed during the year and we concluded that greater value could be driven by a switch to an alternative software provider, resulting in a non-cash one-off charge of £1.1m.  All remaining non-EPOS stores (c300 stores in total) will be converted to the new EPOS system during FY18, allowing the business to introduce contactless payments and the sale of third party gift cards.  We will then upgrade the existing EPOS stores to the new software package in FY19.  Having the entire estate operating on this common platform will leave us well placed to fully leverage future growth opportunities from this investment over the medium term.

As mentioned we have also invested in our online businesses, marketing team and various head office functions to ensure that we have the right infrastructure, talent and capacity to drive strategic priorities and growth.

The Board will continue to assess further incremental investment across the Group on a case by case basis, taking into account the scale, likelihood and timing of anticipated returns.  This ongoing, controlled investment will ensure that we continue to deliver on the four pillar strategy and deliver strong returns to our shareholders over the medium term.

Engagement with our Colleagues

I have visited many of our stores over the past year and I have seen first-hand how much our colleagues care about and are committed to serving our customers. We all recognise that the success of the Card Factory business is down to the ongoing commitment and contribution from our colleagues.  Our customer facing teams hold a key relationship with our customers and, through them, we can continue to be the highly successful retailer that we have been in the past.

We have undertaken our first colleague engagement survey and throughout the past 6 months and we have been actively listening to our colleagues.  They are proud to work in a business with such a strong growth story, but in some important areas we can do better for them.  We have too many gaps in our store management teams, our employee turnover is too high; and we can offer better training to improve loyalty.  Each of these issues are already being addressed and will deliver noticeable returns over the medium term.

To support opportunities in this area, we have recruited a new Group HR Director to ensure that we remain focused on giving our colleagues across the business - in the design studio, our print works, stores, distribution and support centres - a great place to work, and on building on our culture to ensure further success.

Listening to our Customers

Throughout the year we have ensured that we have listened to our customers and they have shared the areas where they feel we are unrivalled and where they think we could do even more.  We remain a brand that is seen to provide great value for money and can be relied upon to have the best prices across the entirety of our range.  They appreciate our wide range of cards and continue to be pleasantly surprised at the quality for such value.  We have now introduced a number of ranges that we previously did not offer and our customers were delighted with these new ranges which have subsequently become strong sellers for us.

However, we can also do things better.  We can improve speed of service; make our shops more convenient to shop; and generally improve the shopping experience.  A number of these will be addressed through our revised EPOS roll out and we are also completing work on store planning and stocking.

Summary & Outlook

I remain confident in the resilience and robustness of the card industry itself and the ability for Card Factory to continue to excel.  Card Factory has and will continue to gain share on the basis of our highly attractive and differentiated quality and value proposition.  We will also continue to increase the mix of both our non-card products and online sales as we further improve our offering in these areas.  This year we will continue to focus on our areas of differentiation and on the additional opportunities that I have identified, and in particular to deliver in the areas that will enable us to be efficient into the future, recognising the external pressures faced by all retailers in the current environment. 

We have a strong brand and recognition as a market leader in our area of expertise.  Our talented teams across the business continue to deliver for our customers and we continue to invest for the future.  We have the capabilities and strategy to deliver going forward which will enable us to offer our customers the quality products at a great price that they have become accustomed to from us.

Whilst the new financial year is only two months old and seasonal sales patterns are distorted by Easter and Mother's Day falling 3 weeks later than last year, we are pleased with everyday like-for-like sales in the year to date.  I look forward to providing a further trading update at our AGM in May.

Karen Hubbard

Chief Executive Officer

27 March 2017

CHIEF FINANCIAL OFFICER'S REVIEW

The "FY17" accounting period refers to the year ended 31 January 2017 and the comparative period "FY16" refers to the year ended 31 January 2016.

Revenue

Total group revenue during the year grew by 4.3% to £398.2m (FY16: £381.6m), driven by growth in the Card Factory store network:

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, 51 net new stores were opened (FY16: 50), bringing the total estate to 865 stores at the year end.

Like-for-like ("LFL") sales growth was broken down as follows by retail channels:

As expected, the ongoing improvements to the depth, quality and merchandising of our non-card product offering led to a continuation of the marginal mix shift to this category, a trend we have seen for a number of years.  The full year mix for FY17 was 55.3% single cards (FY16: 56.4%), 42.3% non-card (FY16: 41.3%) and 2.4% Christmas Box Cards (FY16: 2.3%).  We expect this trend to continue as we further improve our non-card offering.

Revenue from the Card Factory transactional website grew by approximately 50% to £1.6m following strong growth of approximately 500% in FY16.

As previously announced, following a period of sustained strong growth in both sales and profit in recent years, FY17 performance at Getting Personal was disappointing.  We continue to target double digit revenue growth at Getting Personal in the year ahead.  See CEO's report for further details.

Operating costs

Cost of sales and operating expenses continued to be well controlled and can be analysed as follows (excluding non-underlying items detailed below):

            *excluding depreciation and amortisation

The overall ratio of cost of sales to revenue was broadly flat at 68.2% on an underlying basis (FY16: 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 reduction in this cost ratio, as also seen in the first half of the year, principally reflects the improvements in underlying product margins, lower average freight rates and the benefit from various business efficiency initiatives, in particular, Loss Prevention, better stock management and other supply chain efficiencies.  The lower sales contribution of Getting Personal, a lower margin business, also benefited the overall Group gross margin percentage.  As a result of our hedging policy, the weighted average rate expensed to the profit and loss account in FY17 was similar to that recognised in FY16.  As highlighted previously and discussed in more detail below, whilst our existing hedges provide a degree of protection, foreign exchange margin pressure remains an area of concern for FY18 given the 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.  As reported with the interim results, this cost has increased as expected as new stores have been opened and pay increases have been awarded, including the impact of the new National Living Wage.

-       Store property costs: consists principally of store rents (net of rental incentives), business rates and service charges.  This cost has increased in absolute terms as new stores have been opened.  As reported at the interim stage, the ratio of store property costs to revenue has also increased slightly, principally as a reflection of lower than anticipated LFL sales performance.  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 and there remains an opportunity for further savings as these older leases come up for renewal over the coming years.  Following the recent business rates review, we expect our annual rates liability to reduce by c£2m per annum with effect from April 2017. 

-       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 increased slightly from 4.3% to 4.5% with increased online marketing costs and other miscellaneous cost increases being offset by various business efficiency initiatives including our LED conversion programme.

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 2.3% to £28.1m (FY16: £27.4m), although reduced slightly as a percentage of revenue. 

Depreciation and amortisation increased from £9.7m to £10.7m reflecting the continuing capital investment in the Group.

Foreign exchange

With approximately 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 Board adopts the policy of using a combination of vanilla forwards and structured options to hedge this exposure.  The Group has used structured options and similar instruments to good effect for a number of years.  The Board continues to view 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 100% of the anticipated FY18 US Dollar cash requirement at a weighted average rate of c$1.36, lower than the average rate recognised in underlying cost of goods sold in the FY17 income statement of $1.64.  Approximately two-thirds of this US Dollar cash requirement for FY18 is guaranteed regardless of the prevailing spot rate with 11% of the anticipated annual requirement under structured options dependent upon Sterling remaining above $1.10 and the balance under structured options dependent upon Sterling remaining above $1.20.  All structured options are layered in small tranches (maximum individual trade of $2m per month) with knock-out thresholds tested in the month prior to delivery and then reset.  Cover is also in place for approximately 25% of the anticipated FY19 US Dollar cash requirement at a weighted average rate of c$1.36, again through a combination of vanilla forwards and structured options.  Further hedging layers will be added for FY19 during the course of the current financial year.

Underlying EBITDA and Operating Profit

The underlying EBITDA margin of the Group remained broadly flat at 24.7% (FY16: 24.9%), reflecting certain cost increases offset by the benefits of various business efficiency initiatives:

The Group's underlying operating margin was also broadly flat at 22.1% (FY16: 22.4%). 

Looking forward to FY18, our sector faces well-publicised cost headwinds, in particular foreign exchange.  Card Factory has a proven track record of successfully managing such pressures in the past through strong cost control and constant business improvement.  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 we are strategically very well placed to manage this cost pressure over the medium term.  The Board is prepared, if necessary, to invest a small element of our best-in-class margins over the short term to ensure our longer term competitive positioning is further strengthened.  We are also continuing to invest across the Group, including further improvement of our customer proposition and ongoing investment in our digital and IT capabilities and infrastructure in order to enable the delivery of long-term sustainable growth.  For FY18, based on current exchange rates, we anticipate that post mitigation our margins will be approximately 150bps below the levels achieved in FY17 (pre mitigation approximately 300bps), with the impact weighted slightly more to the first half given the phasing of cost trends and the delivery of our various business efficiency initiatives.

Net financing expense

Net financing expense, excluding non-underlying items, decreased by 17.6% to £2.7m (FY16: £3.3m).  The FY17 expense benefited from the debt refinancing completed in June 2015 as well as a slightly lower interest rate margin.  Net financing expense for FY18 is estimated to be approximately £4m.

Profit before tax

Underlying profit before tax for the financial year amounted to £85.1m (FY16: £82.0m), an increase of 3.8%.

The table below reconciles underlying profit before tax to the statutory profit before tax for both financial years:

As highlighted in the CEO's review, following an independent detailed review of a potential EPOS software upgrade to enable further system improvements and efficiencies to be delivered, the Board concluded that greater value could be driven by a switch to an alternative software provider, resulting in a non-cash one-off charge of £1.1m.

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 in line with the prior year (FY16: 20.7%).

Earnings per share

Basic and diluted underlying earnings per share for the year were 19.8p (FY16: 19.1p), an increase of 3.8%.  After the non-underlying items described above, basic and diluted underlying earnings per share for the year were 19.3p (FY16: 19.5p), a decrease of 1.1%.

Capital expenditure

Capital expenditure in the year amounted to £10.4m (FY16: £11.6m), including strategic investments in LED conversions (£0.9m) to reduce our annual in-store energy costs and digital print (£1.0m) as we seek to grow our sales and profit from personalised card and gift segment. 

The FY17 total was lower than the £12m guidance due to the phasing of capex in relation to Printcraft and EPOS, both of which are expected to reverse in FY18.  Taken together with the acceleration of EPOS conversion, the Board anticipates that total capital expenditure in the coming year will amount to approximately £15-16m and then revert to approximately £12m per annum from FY19 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 improved significantly to 90.4% (FY16: 81.2%).  This improvement reflects working capital improvements and slightly lower capex.

As at 31 January 2017, net debt (excluding debt issue costs of £0.7m) amounted to £135.8m, analysed as follows:

Net debt at the year end represented 1.38 times underlying EBITDA a similar level of leverage to prior year (FY16: 1.30 times), reflecting strong cash generation in the year offset by the payment of the special dividend.

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 2017, the Board is recommending an increase in the final ordinary dividend of 5.0% to 6.3p per share (FY16: 6.0p), giving a total ordinary dividend for the year of 9.1p per share, an increase of 7.1% (FY16: 8.5p) and dividend cover of 2.18 times underlying earnings per share.

The final dividend will, subject to shareholders' approval at the Company's Annual General Meeting on 25 May 2017, be paid on 9 June to shareholders on the register on 5 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.  The Board currently anticipates, subject to trading performance, to make a further return of surplus cash to shareholders in line with our stated policy towards the end of the current financial year.

Darren Bryant

Chief Financial Officer

27 March 2017

Consolidated income statement

For the year ended 31 January 2017

All activities relate to continuing operations.

Consolidated statement of comprehensive income

For the year ended 31 January 2017

Consolidated statement of financial position             

As at 31 January 2017

Consolidated statement of changes in equity           

For the year ended 31 January 2017

Consolidated cash flow statement

For the year ended 31 January 2017

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 financial information contained in this preliminary announcement does not constitute the company's statutory accounts for the year ended 31 January 2017 within the meaning of section 434 of the Companies Act 2006 (the "Act") but is derived from those accounts. Statutory accounts for the year ended 31 January 2017 will be delivered to the registrar in due course. The auditor has reported on those accounts. The report was (i) unqualified, (ii) did not included a reference to any matters to which the auditor drew attention by way of emphasis without qualifying  their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

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.

EPOS asset disposals and accelerated depreciation

Electronic point of sale ('EPOS') software implemented over recent years is to be upgraded with a replacement system offering enhanced capabilities. The resulting loss on disposal of redundant assets and accelerated depreciation arising on assets to be replaced in advance of their original estimated useful economic life are considered a one-off event and not representative of underlying performance for the year. As such they are presented as a non-underlying item.

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 and dual remuneration costs during the handover period are presented as a non-underlying item. In January 2017, Card Factory plc announced the retirement and succession of the Chief Financial Officer. Costs attributable to the recruitment of a new CFO 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 prior 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.

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 principally 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 £0.1 million.

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:

Non-underlying items included in the above are detailed in note 1.

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.

* Underlying depreciation and amortisation excludes £0.2m accelerated depreciation on EPOS assets (see note 1).

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:

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

6              Finance income and expense

Amortisation of loan issue costs in the prior period included £1.8 million in relation to previous loan facilities, expensed to the income statement on completion of an amended and extended borrowing facility on 26 June 2015 and presented as non-underlying, see note 1. Fair value losses on interest rate derivative contracts are presented as non-underlying items, see note 1.

7          Taxation

Recognised in the income statement

The effective tax rate of 20.7% (2016: 20.7%) 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:

8          Dividends

The Board is recommending a final dividend in respect of the financial year ended 31 January 2017 of 6.3 pence per share (2016: 6.0 pence per share), resulting in a total final dividend of £21.5 million (2016: £20.4 million). The dividend will, subject to shareholders' approval at the Annual General Meeting on 25 May 2017, be paid on 9 June 2017 to shareholders on the register at the close of business on 5 May 2017. 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 totalling £81.1 million (2016: £82.8 million) were paid in the year with a further £0.1 million (2016: £0.3 million) 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.

10        Notes to the cash flow statement

Reconciliation of operating profit to cash generated from operations

11        Cash and cash equivalents

12        Borrowings