The stock is down by 64% since June 2017
Thursday 11 Jan 2018 Author: James Crux

As Shares goes to press, the flurry of festive updates from retailers is arriving and proving something of a mixed bag.

Set against low expectations, particularly for non-food categories, high street bellwether Next (NXT) fared better than feared over the Christmas period and WM Morrisons Supermarkets (MRW) also beat expectations and maintained positive like-for-like sales momentum. On the flip-side, department store Debenhams (DEB) reported dire trading and issued a full year profit warning.

The one company that really caught our attention was ailing maternity brand Mothercare (MTC), whose shares collapsed to 46p following a worrying festive update (8 Jan) and full year profit alert.

Supermarkets and cheaper online rivals are evidently eating into Mothercare’s business and value investors should be wary of viewing this sell-off as a buying opportunity.

The self-styled global retailer for parents and young children saw UK like-for-like sales slump 7.2% in the 12 weeks to 30 December. Mothercare paid for its ‘conscious decision’ to avoid discounting before Christmas, then discounted more heavily in the end of season sale.

In the third quarter, ‘international trade was challenging’, albeit with a return to growth seen in the Middle East and Russia in more recent weeks.

‘Although there are welcome signs of stabilisation in the International division, the acute operational gearing in the domestic business causes its full year 2018 profit before tax expectations to fall further to a range of between £1m and £5m,’ says Numis analyst Matthew Taylor, whose previous estimate was £10m.

EARNINGS COLLAPSE

Taylor now forecasts a year-on-year pre-tax profit slump from £19.7m to £2.5m for earnings per share of 1.2p (2017: 9.2p), leaving Mothercare looking expensive relative to depressed earnings on a 38 times price-to-earnings mulitple.

Though Mothercare’s heritage brand name continues to resonate overseas, uncertainty over trading trends and the absence of a dividend would perhaps deter financial or trade buyers.

We see merit in the view of Canaccord Genuity’s Sanjay Vidyarthi, a seller with a downgraded price target of just 29p. The Canaccord number cruncher believes ‘there is a place for Mothercare in the UK, but the right-sizing of the store portfolio needs to happen faster’ and also flags liabilities potentially topping £400m.

‘This makes Mothercare a difficult take-out candidate, despite the potential strategic value of the business,’ explains Vidyarthi. ‘The reality is, in our view, that the UK business would already have gone through administration (and potentially come out a stronger, right-sized business) were it not for the cash flows of International keeping it afloat.’ (JC)

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