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City view: Clinton removes another obstacle but challenges remain

Clinton Cards’ decision to place its Birthdays chain in administration highlights how the refinancing of its banking facilities last month was only one piece of its recovery jigsaw and how further painful surgery might be required if the business has a long-term future. By Glynn Davis, City editor


City view: Clinton removes another obstacle but challenges remain

Clinton Cards' chairman Don Lewin says the decision to dump Birthdays was regretful and difficult - not least because 2,000-plus jobs now look in grave danger - but it must also be a relief because the Birthdays chain has been a drag on the group for far too long.

Since its was purchased in 2004 it has been a millstone around management's neck as it has continually drained the company of cash, wit

h Lewin stating that its losses amount to 7 million per year as 50 per cent of its stores are unprofitable.

The City certainly expressed relief at the move and marked the shares up by 37 per cent to 23p. Altium Securities took the opportunity to increase its target price on the group from 8p to 32p on the back of increased pre-tax profit forecasts that will now follow the stripping-out of the annual Birthdays loss.

This undoubtedly creates a much leaner Clintons business - with 360 stores compared with the unwieldy 692 before the administration move. This is a much healthier number but the company should still continue with its divestment programme as it is inconceivable that all the Clinton Cards outlets are producing profits, based on the horrendously high level of unprofitable Birthdays outlets.

If there genuinely is a wide disparity in the relative performance of the two chains then it yet again begs the question of what exactly was management doing buying the business in the first place.

Thankfully for Lewin and his top team this question is now irrelevant and the company can look forward to a much rosier future - investors hope. The very, very early signs look good as the company has disclosed like-for-like sales declined by only 0.6 per cent for the 13 weeks to May 3. This looks to be a respectable performance compared with many other retailers.

But with Birthdays and the banking problem now out of the way the company still faces the key task of overcoming the structural issue that faces the greetings card market (cards account for over 60 per cent of turnover in Clinton Cards stores). This involves the continued pincer movement that the internet and the non-specialists are inflicting on the company.

Walk into a Wilkinson or Poundland store, or any supermarket, and cards can be bought for pennies. Admittedly the range in Clinton Cards is vastly superior with cards available for all occasions (albeit at a price). But even its decent range fails to compete with the internet-only sellers who can provide an even more comprehensive offer including personalised cards at pretty competitive prices.

Whether there is an answer to this problem remains to be seen and will likely determine the long-term potential of Clintons to investors. What the company does have in its favour is convenience, but this is also its main headache because convenience equals lots of stores and with this comes the associated costs.

At 23p the shares have come a seriously long way from the 3.1p they touched in late December but could still deliver more for investors now that the company is in its meanest health for some years. But long-term the worry remains that it is heavily exposed to a structurally challenged category.

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