Good afternoon!

My apologies for being unable to file reports on Thu & Fri this week. We don't want gaps in the sequence, so I've set aside some time today (Sun afternoon) to catch up.


Mothercare (LON:MTC)

Share price: 254p
No. shares: 170.8m
Market cap: £433.8m

Q2 trading update - this covers the 13 weeks to 10 Oct 2015.

I like it when trading updates start with a brief summary, which makes it much easier to quickly absorb things. In this case it says;

Trading remains in line with our full year expectations. The UK is continuing to benefit from our digital and full price trading strategy while International has returned to underlying growth, although continues to face significant foreign currency headwinds.

I'm surprised that the share price has reacted so positively to what is, after all, just an in line with expectations update. Perhaps people were fearing something worse? Or perhaps investors are anticipating continued strength in trading?

The 6.5% increase in LFL sales (UK) for Q2 is excellent, especially as it's been achieved at higher gross margins too. It seems odd this has not translated through to out-performance against expectations. Perhaps the forex headwinds which the company refers to mean International has offset improvements in UK?

My opinion - I've discussed this one with Richard Crow in our audioboom chats, and he likes the turnaround potential here. I recall buying a few at about 230p, but don't seem to have them any more, so must have changed my mind at some point.

The balance sheet is much improved after a Rights Issue in late 2014, although note that there's quite a hefty pension deficit shown - £81.2m at 28 Mar 2015 - which needs to be taken into account when valuing the shares. Note 29 to the last Annual Report shows how the scheme liabilities shot up from £303.0m to £364.6m mainly due to changes in the actuarial assumptions. The discount rate fell from 4.5% to 3.5%, which seems to be the culprit, as that will expand the present value of future scheme liabilities by quite a lot, as they're being discounted at a lower rate. Maybe the pension deficit will disappear again in due course when interest rates normalise, but how many years have I been saying this, and interest rates remain artificially low. Is this the new normal? If it is, then pension deficits won't…

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