As the festive season approaches, businesses across various sectors gear up to make the most of the holiday cheer.
From retailers cashing in on gift-giving and celebratory feasts to brands leveraging seasonal demand for creativity and entertainment, the holidays can be a critical driver of earnings.
Here are three companies poised for an important festive period.
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Card Factory
Card Factory specialises in greeting cards and gifts, with around 1,000 stores across the UK and Republic of Ireland.
The second half of the financial year, which includes Christmas, usually accounts for the majority of its annual profit. This year, it's even more significant.
A quick look at recent performance shows a fall in profit at the half-year mark, and the valuation took a hit. But weaker performance was already expected, as management had guided towards more weight in the second half, even before the results.
The important thing is that there's been no change in their full-year guidance, which signals confidence from management, and we think some positives have been overlooked.
But with a recently expanded product range and a new model to drive store efficiencies, preparations are well underway for the Christmas rush.
Card Factory produces nearly all of its single greeting cards in-house, which means it can control quality and cost. This vertical integration is a big selling point.
Card Factory's average card sells for just £1.21, well below the market average, making it a price leader.
There are growth opportunities too.
In the UK, Card Factory has less than a 4% share of a £13.4bn market for greeting cards and celebration essentials, so there's room to grow locally. But the real growth story lies internationally where it's exploring promising markets like the US, which has a £4.5bn greeting card market.
Taking a step back, the business took a hit during the pandemic, but its recovery has been impressive, with a strong balance sheet and a disciplined approach to distributions.
The key risks are competition in the online space from more premium rivals like Moonpig, which is still a small part of Card Factory's business. The UK card market itself is also mature, so they need to either gain market share or expand overseas to drive growth, neither of which is easy.
Games Workshop
Games Workshop is a global leader in tabletop miniature gaming, primarily through its Warhammer franchise. It owns all its intellectual property (IP) which it uses not just in physical products but also in licensing deals, notably with video game developers.
The business model is unique in that Games Workshop handles everything from product design and manufacturing to distribution and retail, which helps them control costs, maintain quality, and drive high margins.
Warhammer 40K is the standout franchise, and Games Workshop licences out the IP to allow third parties to lean on the brand. Warhammer 40K's licensing income was a major boost to last year's financial performance, delivering a huge 87% operating margin, compared to 35% for the core product lines.
Licencing is already a big part of the strategy, and it's not just limited to games. There's an agreement with Amazon to explore adaptations of the Warhammer 40K universe into films or series.
It's still early days, as the creative direction needs to be approved by both parties. But if it goes forward, it could significantly expand Warhammer's brand visibility.
Management's been cautious about the coming year because it's up against a record year just gone and there’s no big new deal like the Warhammer partnerships seen last year.
That said, performance in the new year has been impressive with other titles stepping up. There’s a renewed sense of optimism among analysts who now expect revenue to grow around 7% this year.
Looking under the hood, Games Workshop is entirely debt-free and has a decent cash hoard, which gives a lot of flexibility.
That's allowed the group to be generous with shareholders, and dividends have grown at a 26% compound annual rate since 2015. As ever, no returns are guaranteed.
We think Games Workshop is well-placed to leverage its powerful brands. One key risk is the cyclical nature of the product releases, and sales can fluctuate depending on whether a big release has come out in any one particular year.
There's also licensing unpredictability – while it's highly profitable, it can be tough to forecast accurately.
Marks & Spencer (M&S)
M&S is entering the festive season with a lot of positive momentum.
The group smashed first-half profit expectations, largely thanks to strong volume growth in its Food business and continued cost-cutting efforts.
The Christmas period is pivotal for M&S, especially given how well it's positioned with its food offerings, which are known for their quality and seasonal appeal.
Demand for its food remains strong. Volumes have been growing ahead of the broader market for four years in a row now.
Operational changes are helping M&S save on costs, which means they can keep food prices competitive, attracting more families. That's particularly important heading into Christmas, when people are looking for quality without breaking the bank.
The joint venture with Ocado is still a bit of a mixed bag. It benefited from the pandemic and continues to improve, but it’s still loss-making, and there's uncertainty about future profits.
In Clothing & Home, M&S has made significant strides.
Sales growth reflects improved customer perceptions of value, quality, and style – no small feat, especially in a market as tough as retail clothing.
What's really impressive is that over 80% of M&S clothing is sold at full price, which is much higher than most of its rivals.
Overall profitability for the group dipped slightly in the first half due to investment in digital platforms – but we see this as a positive for the future of M&S. Levelling up its online presence is crucial, especially as physical retail faces an uncertain outlook.
All in, M&S is in the best shape it's been in for a while. Improved cash generation and a strong balance sheet have helped it to reduce net debt, and dividends, while never guaranteed, have been restored.
The valuation has recovered significantly over the past year, now sitting in line with peers, which we think is fair given the quality of the offering but adds risk. M&S has the right ingredients in place to perform well, but the Christmas trading period will be a real test.
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