Mothercare (LSE: MTC) is up 4.5% on Thursday in the wake of upbeat full-year results. Elsewhere, Thorntons (LSE: THT) has drawn my attention in recent weeks, with its stock up 26% over the last three months. If I were to invest in the retail space today, however, I’d probably choose Ted Baker (LSE: TED). Here’s why.
A recovery play, you’d add volatility by including Mothercare stock in your portfolio. Full-year results were released today and showed underlying pre-tax profit up 37% at £13m, backed by decent trends for like-for-like sales.
Mothercare has doubled in value in the last 12 months, and currently trades at 235p, which points to more downside than upside, in my view.
As it continues to shut down underperforming stores, while betting on online growth (a strategy that seems to be paying off), its statutory pre-tax losses still stand at £13.1m, which is an improvement against the £26.3m loss it reported one year earlier, but is not a good enough performance to deserve my attention.
I’d need more evidence that its turnaround is on track in order to pay 40x forward earnings for a company that is shrinking and whose core margins are incredibly thin. That said, the good news is that it has successfully recapitalised its balance sheet, “ending the year with net cash of £31.5m compared to net debt £46.5m” one year earlier.
“The board of Thorntons has been informed by Jonathan Hart that he will be stepping down as chief executive officer and resigning his directorship from the end of the current financial year on 27 June 2015,” the chocolatier said on Monday, adding that a search for his successor is to be initiated. In the meantime, chief operating officer Barry Bloomer will act as interim chief executive.
Investors were caught by surprise as the announcement comes in the midst of a comprehensive restructuring that seems to be paying dividends, although the stock is still down 20% over the last six months. Its relative valuation suggests that Thorntons could be a calculated bet, given that it trades on net earnings multiples of 16x and 12x for 2015 and 2016 — uncertainty surrounding its management team may impact short-term returns, however.
Just like Mothercare, there’s no dividend attached to the investment.
Finally, Ted Baker belongs to a different league.
Its strength shows all the way through its income statement, balance sheet and cash flow statements. Fast-rising earnings will support a dividend policy that will likely become more generous over time, although its valuation, at about 28x forward net earnings and 17x adjusted operating cash flow carries more risk now than 12 months ago.
The shares have risen 30% this year, and 15% in the last three months, but in relative terms they could become much cheaper simply because forward p/e multiples could drop by 20% or more if management continue to surprise investors, just as they done for several quarters now.
I’d bet on that.