News Column

Mothercare shares jump 19% after update

May 22, 2014

Nick Fletcher,

In a positive day for some of the UK's best known high street names Mothercare - along with Halfords - has pleased investors with its latest update.

The retailer said worldwide sales rose 0.5% to 1.19bn - despite unfavourable currencies and a 7.5% drop in UK sales as its continued to close loss-making stores. In all profit before tax jumped 61% to 9.5m, boosted by its international business and a lower payment relating to share incentive schemes. As it searches for a new chief executive, chairman Alan Parker admitted the year had been challenging but was fairly upbeat about the outlook:

After an encouraging set of interim results, third quarter trading over peak was a disappointment. We saw a recovery in the fourth quarter trading performance and have delivered full year results in line with market expectations set in January 2014.

This momentum has been maintained into this quarter, and we look forward to sustaining this improvement in the new financial year.

The news lifted the company's shares 27p higher or more than 19% to 165.75p. Analyst Mathew Taylor at Numis said:

Full year trading results matched expectations, with reported pretax profit ahead of consensus due to a reduced share-based payment charge. Net debt was on track and the facilities headroom has increased to 100m.

Underlying trends in the international business remain robust but the group is facing into a stern currency headwind, especially in the first half. Meanwhile, the UK store closure and cost reduction programmes are being completed, with the future longer-term strategy pending the appointment of a new chief executive. We see clear value in the shares for funds with risk appetite but await clarity on the management situation.

Cantor Fitzgerald'sMike Dennis however retained his sell recommendation:

The shares have fallen 65% this year and given the interim chief executive, Mark Newton-Jones, is still on a short list of around 7 potential candidates, we see the lack of any new strategy as a risk to the share price. This, plus the discussions with PWC, Barclays and HSBC over covenants, and the lack of interest from private equity at these valuations remains, in our view, a significant risk to the equity value.

In our view, any management recovery plan might require more capital and higher lease provisions on an already weak balance sheet. Mothercare's management will need to address the potential reduction in international profit (mainly foreign exchange), the role of Early Learning Centre within the Mothercare group and how they plan to reduce UK losses aside from continuing to close loss-making over rented high street stores.

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Source: Guardian Web

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