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Yesterday, card factory (LSE: CARD) was one of the top performers on the London Stock Exchange. When the market closed at 4:30 p.m., shares of the card and gift retailer had risen 33%.
So what’s behind this huge spike in stock prices? And, more importantly, is it time to buy those stocks for my portfolio?
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Why Card Factory’s stock price just went up
The reason the share price jumped yesterday was because the company announced that it had agreed terms for a refinancing with its current banking partners.
This is a big deal for the retailer, as Card Factory has racked up a lot of debt on its balance sheet in recent years and it’s unclear how it will handle that debt.
Some investors thought the company might have to raise funds through a capital raise. This scenario would have been harmful to existing shareholders as it would have diluted their stake and caused the share price to fall.
Under the terms of the refinancing agreement, Card Factory will have a £100 million revolving credit facility (RCF) available until September 2025. It will also have smaller term credit facilities to be repaid between the beginning of 2023 and 2025. business support and eliminate the need for a capital increase.
Overall, this is a positive development and good news for shareholders. Ultimately, a big risk here has just been removed and this is reflected in the surge in the stock price.
Should I buy Card Factory shares now?
As to whether I would buy Card Factory stock today, I am not convinced that the risk/reward proposition is attractive at this time.
One thing that concerns me here is inflationary pressure. In January, the company said rising costs would not be fully mitigated by pricing actions, resulting in weaker-than-expected fiscal 2023 profit. I expect the higher costs to persist for some time.
It should be noted that Card Factory has a low gross profit margin (28% last year). Companies with low gross margins can see their profits drop significantly when inflation is high.
The purchasing power of consumers is linked to this. Right now, many UK consumers are really feeling the pinch due to high energy costs. Companies such as Card Factory, which sell non-essential goods, could be negatively affected if consumers cut spending.
I also have concerns about the long-term growth potential here. According to ResearchandMarkets, the size of the global greeting card market is expected to shrink by around 2% per year through 2026. With the market downturn, Card Factory will have its work cut out for it to generate growth.
Also, there will be no dividends here for a while. Under its loan agreements, the company is not permitted to pay short-term dividends.
So, while the refinancing news is definitely positive, I will not be buying Card Factory stock for my portfolio. In today’s inflationary environment, I think there are better stocks to buy.