Good morning.



Mothercare (LON:MTC)

Preliminary results for the year ended 29 Mar 2014 are issued this morning, and are actually not as bad as I was expecting. The Balance Sheet is certainly weak here, and in need of an equity fundraising, since net tangible assets are negative £29m - clearly a situation that needs fixing, so I would pencil in dilution from a probable future £50-100m equity fundraising at some point.

You might recall that the Sunday Times reported earlier this month that Mothercare was seeking a relaxation of their banking covenants. The company went into spin mode, and issued a response to media comment RNS, which basically confirmed the story, whilst sounding as if it was denying it. This was not clever at all, just PR gone mad, in my opinion. The market reacted by marking the shares down again, after a brief 10p bounce. My take on it was published here.

Companies need to realise that if things are bad, the market will respect you more if you just tell it how it is, along with an explanation of what you are doing to fix it. Trying to gloss over negatives, as in this case, just harms a company in the long run, as it undermines trust in management.

Anyway, on my cursory glance over today's results, Mothercare doesn't look like a company that's going bust, especially given the highly lenient attitude of the Banks towards Listed companies at the moment. Q4 trading seems to have improved, and overall they seem to have stabilised the situation.

Mothercare is a very odd situation in that its UK retail operation is loss-making, and they are having ongoing difficulties exiting from problem leases - a painful & expensive process, because landlords will not allow tenants to exit problem leases unless they can re-let the shop on at least equally favourable terms to someone else that is at least as financially strong as the existing tenant. Hence it can require very large financial penalties to persuade the landlord to take back the unit. Or, if you can find another retailer to assign the lease to, you might well have to subsidise their rent through an extended rent-free period, and/or paying them an up-front cash incentive to take on the unit (called a reverse premium).

These issues are…

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