Is a recovery in sight for these beaten-up value stocks?

Are these two beaten-up value stocks great turnaround plays?

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Shares of Mothercare (LSE: MTC) fell by as much as 21% on Thursday as investors fretted over a weaker than expected trading environment that is weighing on the company’s outlook.

Disappointing results

The global retailer for parents and young children delivered disappointing results for the 28 weeks to 7 October with a widening of its statutory pre-tax loss to £16.8m, up from a loss of £0.8m a year ago. On an adjusted basis, results were just as dire, after falling into the red, with an adjusted pre-tax loss of £700,000, against profits of £5.9m during the same period of 2016.

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Total group sales also declined 2.4% to £339.5m, as a result of continued weak trading in the Middle East and the closure of underperforming stores in the UK. And looking forward, Chief Executive Mark Newton-Jones warned shareholders that the company has witnessed “a softening in the UK market with lower footfall and spend” in recent weeks.

However, he added that the Mothercare brand is in “a stronger position with a much-improved product and service offer and a more robust business model” against an uncertain consumer backdrop.

Is a recovery in sight?

Certainly, its latest set of results were worse than expected, but the company is seeing good progress in a number of areas too. The restructuring of its UK business continues apace, with like-for-like sales up 2.5% and online sales growing by 5.3%. Online now accounts for 42% of its UK retail sales, up from 23% four years ago.

Mothercare, which wants to cut its UK store estate to between 80-100 and focus on growing online sales, has closed another 10 shops in the first half. It’s a strategy that appears to be paying off, as margins have been improving too. The seeds of recovery have really been sown, but there’s no clear sight as to when its earnings will finally improve.

As expected, valuations are undemanding, with shares trading at a price-to-sales ratio of 0.17, against the retail sector’s average of 1.12 times.

Another turnaround play?

Mothercare isn’t the only high street consumer stock which has posted disappointing returns in 2017. Shares in electricals and mobile phone retailer Dixons Carphone (LSE: DC) are down 55% year-to-date after it warned shareholders to expect a steep fall in profits this year.

Dixons Carphone is facing a challenging outlook in the UK mobile phone market, since consumers have been putting off new smartphone purchases, leading to longer upgrade cycles and recent weak demand. And it’s not the only negative thing from the changing mobile industry landscape, with new EU roaming legislation set to crimp mobile network contract revenues, reducing the share of income which the company gets from existing contracts.

As a result, the company now expects 2017/8 pre-tax profits to fall to between £360m and £440m, down from £501m last year.

Low valuations

There is one consolation though, and that is valuations are cheap. Shares in the company trade at 5.8 times forward earnings with a prospective dividend yield of 6.7% this year.

On the downside, I reckon there’s less that Dixons Carphone can do to turn around the business, meaning potential upside for the stock could be weaker. A lot of its problems appear to be structural, and there’s no simple solution to reverse its earnings outlook.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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