“Investors could have been forgiven for fearing the worst after last December’s profit warning and layoffs at Etsy, where the American firm blamed a weak crafting market, so IG Design’s management team deserve plenty of credit for the big improvement in earnings and cashflow in the year to March, which has come despite the 10% drop in annual sales,” says AJ Bell investment director Russ Mould. “Shares in the greetings cards, crafting, gifts and gift-wrapping specialist are pausing for breath after a strong run and much will now depend on whether the company’s turnaround and growth plan can deliver the targeted underlying operating margins of 4.5% by March 2025 and 6% by March 2027.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts, management guidance and targets.
“The 10% drop in full-year sales, to around $800 million, was flagged alongside the autumn’s first-half results, when chief executive Paul Bal flagged a slow start to the festive season in America, a resumption of more normal, seasonal patterns post-pandemic and also the ongoing work to extricate IG Design from unprofitable contracts.
“Last June’s refinancing of the company’s debt gives IG Design plenty of time in which to manage its turnaround, the need for which lies in two acquisitions.
“The first was 2018’s purchase of the American business Impact Innovations, for an all-in cost of just under £100 million, and the second was 2020’s swoop for America’s CSS Industries for £90 million, including debt.
“Both deals broadened IG Design’s geographic reach, customer base and product range but they brought debt, an increased reliance on seasonal business at Thanksgiving and Christmas and exposure to retail giants such as Wal-Mart. While such sales relationships can be very helpful, given the route to market that they offer, they can bring challenges, too. IG Design outsources the majority of its product production and at a time of inflation and rising freight and input costs that leaves the firm as the meat in the sandwich between sub-suppliers on one side and price and margin-conscious retail buyers on the other.
“These challenges lay at the heart of IG Design’s profit warnings of October 2021 and January 2022 and a slump in the share price from a high near 800p in early 2020 to lows of less than a tenth of that in 2022.
“Even after the latest surge in the share price that leaves a lot of ground to recapture, but further progress in the underlying operating margin in 2025 should help to boost investors’ confidence, even if they will note with some concern the $5.5 million legal provision that will weigh on the stated results. IG Design continues to take legal advice.
Source: LSEG Datastream data. Company known as International Greetings until June 2016.
“Even the 2025 and 2027 target margins are not a particularly fat return on sales, so IG Design still has much work to do as it looks to recover from 2021’s woes. The firm is also yet to return to the dividend list, although analysts do expect a payment in the current fiscal year – the first since the interim distribution back in 2022.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts.
“At least the skinny target margin is reflected in a lowly valuation, so if IG Design can reach its goals, or even exceed them, the shares could still look cheap.
“The £217 million market capitalisation compares to analysts’ forecasts for annual sales of around £650 million at current exchange rates for the year to March 2025, while the 227p share price could look tempting if earnings per share get anywhere near their 2020 peak of 16.9p and the dividend ever gets near to 8.75p a share again.
“Management’s target of a 6.5% operating margin for 2027 implies an earnings per share figure that exceeds the prior high and should help cash flow, too.
“The company has around $64 million in borrowings and cash of $157 million, so even if $68 million of leases are taken into account then IG Design has a net cash balance sheet, as of the end of the last fiscal year. A net finance charge for 2024 overall suggests the picture is not quite that simple, presumably owing to substantial working capital swings during the year thanks to the strong seasonal element of the gifting and crafting business, but the company’s balance sheet looks a lot tidier than it did. Less borrowing means less risk and less risk can mean a higher share price, or at least persuade investors to pay a higher multiple of earnings and cash flow, all other things being equal.”
