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This year has been a turbulent for Mothercare. In the past 11 months the retailer has issued a profits warning, a change of CEO, a takeover offer and announced a rights issue.
The share price collapsed at the beginning of the year when the Watford-based company issued a profit warning in January. The share price continued to decline thorough the first half of the year, and in May it dropped to its lowest level in three years. The month of May coincided with the company posting a 61% jump in full-year pre-tax profits, which exceeded the lowered profit estimate. This sparked renewed interest in the company and the stock snapped out of its downward trend.
The company’s share price suffered another blow in July when it announced that total UK sales for the 15 weeks until July 12 declined by 1.2%, even though sales of stores that were open at least a year were up 0.9%.
Mothercare operates in nearly six countries; it has 1,221 international stores, which accounts for 60 percent of its revenue. The overseas business is being held back by the underperforming UK division. The retailer specialises in products for parents to be and is in the process of embracing e-commerce, as it has been losing out to Amazon and supermarkets that have a better online presence. Mothercare’s 220 stores in the UK will be trimmed to 160 outlets between now and 2017.
In the summer, it rejected a £226 million takeover approach from the US company Destination Maternity. The offer was knocked back on the grounds that it undervalued the UK firm; the market capitalisation of Mothercare currently stands at £296 million. The CEO of the Philadelphia-headquartered business stepped down after the failed takeover attempt of Mothercare, and the US company has issued two profit warnings this year; I doubt it will be making another bid for Mothercare anytime soon.
The turnaround is going to be funded by the £100 million rights issue that was announced in September, and the aim is to pay down debt and convert the high street-heavy firm into a ‘digitally’ focused business. The new CEO Mark Newton-Jones is to invest £400,000 of his own money into the rights issue. Mr Newton-Jones is certainly leading by example.
Equity analysts are bearish on the stock; out of the seven recommendations two are buys, one is a hold and four are sells. The average target price is £1.77, which is marginally higher than the current price.
Mothercare will reveal its full-year figures in May 2015, and the consensus is for revenue of £711 million and adjusted net income of £9.6 million. Last year the firm reported full-year sales of £724 million and total adjusted net income of £6.8 million. The fact that analysts are predicting an improvement on last year’s numbers is encouraging.
The 200-day moving average is providing support at £1.69, and the next level of support is likely to be at £1.50. The immediate target to the upside is the 100-DMA of £1.84, and if that level is cleared then £2 will be on the radar.