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Mothercare success likely to be shortlived
Having delivered 4.5% growth in fourth quarter UK like-for-like sales, babywear purveyor Mothercare (MTC) has raised hopes of a viable turnaround. We still see forecast risk to the downside given the inflationary and competitive headwinds facing the UK business.
Further quarterly UK like-for-like progress was driven by online sales growth; the online channel now accounts for more than 40% of Mothercare’s domestic revenues.
Bears would therefore argue Mothercare remains over-spaced with 152 UK stores, although revenue growth also reflected the refurbishment of 70% of the store estate to a new, modern format, improved customer service and a positive response to spring/summer ranges.
For the year to March 2017, Numis Securities, a buyer with a 150p price target, forecasts modest pre-tax profit improvement to £20m (2016: £19.6m) ahead of a £22m pre-tax haul this year.
Based on estimated March 2018 earnings of 10.5p, a prospective PE ratio of 11.6 may appear optically attractive, yet given cut-throat domestic competition and a weakening UK consumer backdrop, further disappointments cannot be ruled out.
We view Mothercare as a value trap at 122p (JC)