This gifting giant could still surprise investors

Nowhere is that defiance more pronounced than in the UK. According to the Greeting Card Association, a trade body, Brits send more cards per capita than any other country, spending some £1.7bn on these messages each year. Most of this cash flows towards bricks-and-mortar retailers, such as high-street mainstay Card Factory (CARD), although customers are increasingly turning to online players to help them send personalised messages.

Figures compiled by online market leader Moonpig (MOON) indicate that internet-based sales accounted for less than 7 per cent of the UK’s greeting card market in 2016. Six years later, this figure had climbed to 14.5 per cent – and by 2026 the company predicts that nearly one-fifth of cards will be purchased over the internet. However, Moonpig clearly believes that the real opportunity is in suggesting the perfect add-on gifts to website visitors. In other words, a clueless son can now get a few tailored hints about what his mum might want for her birthday (beyond those usual flowers).

Something special

Moonpig listed in early 2021, when locked-down consumers were turning to the internet for virtually all of their shopping needs. Sales reached an all-time peak of nearly £370mn that year before retreating as pandemic restrictions were lifted. Unsurprisingly, the shares followed a similar downward trajectory. “Customers returned to stores at a greater pace than many expected, leaving online pure-plays grappling with cost bases and overhangs from inventory levels built for different levels of demand,” noted Deutsche Bank analysts in July.

However, web purchases as a percentage of total retail sales are now far higher than they were pre-pandemic – suggesting any mass return to the high street was a passing craze. It seems some customers continue to prize the convenience of online shopping over the tactile in-store experience. This is certainly borne out in Moonpig’s retention figures: some 89 per cent of revenue was generated from existing customers in its last financial year, as it was in FY2023. 

On an earnings call in June, chief executive Nickyl Raithatha said the group’s strategy was to build a “customer loyalty business” in which these repeat shoppers spend more on the platform each year. To drive this increase, the company offers a growing selection of attached gifting options ranging from chocolates to so-called “experience day vouchers”. Sales of cards alone totalled £172mn in Moonpig’s last financial year, while accompanying gifts brought in nearly £111mn.

Growth in the latter segment was essentially flat, and an outcome the business attributed to cost of living pressures. Given well-documented volatility across the wider world of retail, management was reasonably pleased with the performance. “It [speaks] to the power of the business model that where we bring customers in for cards, we upsell them to gifts and we can drive gifting growth without having to push water uphill, from a marketing perspective,” Raithatha said on the call.

Within its accounts, the group separates ‘experience gifts’ – which include vouchers for spa days, restaurants and cinema tickets – into its own revenue line, separate from other gifts. At 1.5 per cent, growth here was also muted in the most recent financial year to April, although that’s to be expected given the higher price point of many of its products. Deutsche Bank, for one, sees growth ticking up. “As a small ticket, ‘feel good’ and emotive purchase, we expect purchasing in Moonpig’s premium card and attached gifting category may be one of the earlier retailers to feel the benefit of improved consumer confidence,” its analysts recently predicted.

The only division that doesn’t seem to be gathering momentum is Greetz, Moonpig’s Dutch subsidiary, which saw revenue decline by 5 per cent in the second half of last year. While that’s an improvement on a 10 per cent decline in the first half – and the 20 per cent drop recorded across FY2023 – the unit is undoubtedly a weak spot for Moonpig. Fortunately, the division only accounts for 15 per cent of group sales, meaning it’s unlikely to weigh too heavily on the group-wide investment case.

Gifts to shareholders?

More consequential is the state of the company’s balance sheet. We expressed misgivings about negative shareholder funds in the first half of FY2024 – a situation exacerbated by big outstanding debts, a negative current ratio and a high ratio of payables to receivables – although shareholder equity had turned positive by the financial year end. The cash-generative nature of the business also helped it shrink its net debt from two to 1.3 times’ adjusted Ebitda (earnings before interest, tax, depreciation and amortisation) in the same time period. These factors, coupled with revenue and profit progress, are largely responsible for the stock’s steep upswing in recent months.

“Management is flagging that the market should expect mid-teen earnings per share (EPS) growth in the medium term,” say Peel Hunt analysts. “That is pretty exciting, but add in a cash return, and it is easy to see why the shares have started to move.” The broker predicts that a buyback could commence as soon as next month. The anticipation around forthcoming returns has also outweighed the impact of several recent disposals by institutional investors.

Just this week, Exponent Private Equity and its co-investors sold their remaining holding of 20mn shares. This is the third such sell-off to take place this year, meaning that the shares are no longer threatened by the overhang, although there is reason to believe Exponent et al have exited at a decent valuation. FactSet-compiled consensus forecasts put Moonpig shares on 15.3 times this year’s earnings – placing it decidedly outside of bargain territory. Card Factory, by way of comparison, trades at just under nine times its projected earnings.

Of course, a high-street chain weighed down by inventory and leasing demands is not necessarily Moonpig’s most direct competitor. The superiority of Moonpig’s rating should be seen against its higher operating margin (see chart), better economies of scale, stronger brand equity and stickier online sales channels. While selling into a potentially more price-sensitive market, online-only white goods retailer AO World has a comparable market capitalisation of £640mn and trades on a forward price/earnings multiple of 21. All of which is to say that Moonpig’s shares look to be decent value given they likely have further to climb.

When it comes to gifting, received wisdom says it’s the thought that counts. But a personalised card and a selection of artisan chocolates will almost always count for more than a “happy birthday” text. As consumers start to feel better off, they’re likely to feel more generous, too. Moonpig’s investors could be the additional beneficiaries.