A value proposition for either consumers or shareholders is not obvious!

8th Jan '18 by Dearg Doom

2 comments 1990 reads

Mothercare (LON:MTC)

Share Price 46.37p (Down 26.5% today)

Bid Offer 46.25p/46.5p Mkt Cap Circa £78 million NMS 3,000

Introduction

Positive past rhetoric from management has brought in many new investors who chased the share price higher for awhile. The share price reached 772p high in 1996 than again a lower high at 523p in 2009. I was tempted myself to purchase stock in March 2016 at 125p. Quickly, sold later however at circa 140p following a disappointing trading update in July 2016. Mothercare trading updates do always tend to disappoint.

18 months later, the share price today is trading at only a third of it previous share price. Speculators may consider this the new bottom and will probably relish the chance to have a punt. I wish them luck!

In the past, I have also bought other fashion retailers like French Connection, Laura Ashley and Boohoo. The first two stocks were recovery play which to this day are still stuck in similar recovery mode. Thankfully, I lost patience and I sold both of them at a small loss. Troubled retail stocks are generally value traps. They should only be bought when the stocks' fundamentals are improving and there is a tailwind behind the sector.

The third stock Boohoo plc was different in that it was a growth story. Unfortunately, I snatched too early at my double-digit gains. I have since regretted it because the share price went on to be a seven-bagger.

Link to my previous March 2016 article

Trading Update for 12 weeks up to 30/12/17

Find the link for the trading update here.

Mothercare's Lowlights

· UK like-for-like decline impacted by lower footfall and spend, both in stores and online, following the continuation of consumer trends flagged in our half-year results

· International sales remain challenging, stabilising toward the end of the period

· Overall Group performance below expectations

In their UK business, management took a "conscious decision to remain at full price to protect their brand positioning prior to Christmas but to then discount more heavily at the end of season sale".

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Dearg Doom

2nd Mar '18

Enterprise Vaue £80mMarket Cap £42.5m

Share Price 21.5p Bid/Offer 21.5p/22p

Press speculation has seen the share price dropping on no apparent official news has prompted management action to put out clarification of company's position with an RNS released at 12:00 p.m. today.

In brief:

Debt level close to ceiling of £50 miliion
Any profitability indicated very much in doubt
Exploring additional financing options
Transformation program will cost money

Since our trading statement of 8 January 2018, our trading and financial performance has remained broadly in line with the Board's expectations. Given the successful management actions on cash generation, we now expect net debt at year-end to be slightly better than the £50 million previously guided, and for adjusted group profit before tax to be at the lower end of the previously guided range of £1-5m.

Reflecting the more challenging trading environment and our seasonal cash flows, we are working with our financing partners with respect to our financing needs for FY19 and beyond. We forecast our borrowings to increase towards the limit of our total committed and non-committed facilities at various points from the start of the new financial year, and will therefore require waivers of certain financial covenants. We are also exploring additional sources of financing to support and maintain the momentum of our transformation programme. All of these discussions are ongoing.

As previously announced and as part of our transformation strategy we have taken decisive action to reduce our central cost base. The business is also continuing with its planned strategy of reducing the UK store estate whilst increasing digital capabilities, with over 40% of our sales now being taken through digital channels.

As forecasted in my Jan 18th 2018 article, the company remains over leveraged with declining revenues, increasing cost base, shop closure writeoffs, pension liabilities, and is barely profitable on best forecasts.

The company is essentially up for sale and may be worth less than the present share price.

I once was enthusistic about the company prospects. Less so now obviously. So many better bargains will appear that I can afford to let this one go.

Regards

Dearg Doom @MyDeargDoom

JohnEustace

The demise of Toys R'Us and their Babies R'Us brand may offer Mothercare some respite.

A value proposition for either consumers or shareholders is not obvious!

Mothercare (LON:MTC)

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Dearg Doom

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