Will the Mothercare share price ever make a successful comeback?

Is the Mothercare plc (LON: MTC) share price a falling knife worth catching?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Over the past 12 months, the Mothercare (LSE: MTC) share price has fallen 85% as the retailer’s turnaround has hit a wall.

Shareholders and senior management alike have been pinning their hopes on the turnaround strategy set out by CEO Mark Newton-Jones, who came to the business four years ago from online retailer Shop Direct with an impeccable record. 

However, after a disastrous Christmas trading period, exacerbated by Newton-Jones’s strategic decisions at a time when the rest of the retail industry slashed prices to attract shoppers, the CEO was replaced with immediate effect at the beginning of April. 

David Wood, a former Tesco executive, has now stepped into the breach. Wood has also recently been working as president at the US department store giant Kmart, so it certainly seems as if he has the right credentials.

Unfortunately, the challenge he has inherited might prove to be too much even for this retail veteran.

On the edge of a cliff 

Mothercare is currently locked in talks with its lenders over a new finance package to keep it afloat. According to a trading update published by the company yesterday, these talks have been “constructive“, and the group is looking at alternative sources of funding as well. Floor space was reduced by 11% for the 12 weeks to March 24, and Woods is reportedly planning to eliminate another third of outlets that are underperforming. Sales fell 5.6% in the UK and 11% overseas for the period. These figures illustrate the challenge facing new management.

Nevertheless, in my opinion, it’s not time to give up on Mothercare just yet. The company does have some strengths, its brands are recognisable throughout the UK, and the online business registered a turnaround sales growth of 2.1% for the 12-week period.

That said, threats to the group’s existence are numerous. Cheaper competition online, falling discretionary incomes and rising costs across the firm’s store portfolio mean that Mothercare is operating in a very hostile environment. There’s also the company’s debt to consider. Management has been guiding for debt of £50m for 2018, which according to my calculations, will give a debt-to-equity ratio of around 100%.

Buy, sell or hold? 

So, Mothercare does have some strengths, but the company is being hobbled by its sizeable physical store presence and weak balance sheet.

With this being the case, it’s no surprise the company is considering a CVA to shut down 47 of its 143 stores (according to news reports) and change rent terms on the others. This may be the best outcome for the group. Exiting unprofitable stores and reducing the rent roll will allow it to focus on the development of the online business, one of the firm’s principal strengths.

However, if management does choose to go down the CVA route, it’s unclear how investors and the Mothercare share price will fair. For the time being then, until we have more clarity on Mothercare’s outlook, it looks to me as if the shares are uninvestable, although my Foolish colleague Peter Stephens seems to disagree

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Tesco. 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.

More on Investing Articles

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

Should I buy Lloyds shares while they’re still under £1?

The banking sector might finally be back on the road to long-term health. I'm thinking of buying more Lloyds shares…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Using the price-to-earnings metric to find the cheapest UK shares to buy now!

There’s certainly no shortage of value UK shares right now. I'm finding the cheapest stocks for my portfolio using the…

Read more »

Man changing battery on electric bicycle
Investing Articles

Stock market recovery: my top 2 FTSE 100 shares to buy this month!

The UK index might be trading above 7,500, but many FTSE 100 shares still haven't recovered. In fact, plenty trade…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

4 of my best shares to buy for an autumn stock market bounce

Jon Smith explains which are his best shares to buy depending on different scenarios behind a potential market rally.

Read more »

Risk reward ratio / risk management concept
Investing Articles

Is the GSK share price good value after the 13% fall last week?

Jon Smith considers the reason behind the sharp fall in the GSK share price last week, and wonders if now…

Read more »

Young black woman in a wheelchair working online from home
Investing Articles

At under 5p, are Woodbois shares a no-brainer buy now?

I didn't buy Woodbois shares when they were up over 8p. Now they've fallen back, I'm wondering if I'm seeing…

Read more »

Business development to success and FTSE 100 250 350 growth concept.
Investing Articles

Are we about to see a raging bull market for shares?

Investor sentiment looks like it's changing and we could be in the early stages of a bull market for shares…

Read more »

Black father holding daughter in a field of cows
Investing Articles

I’m investing just £5 a day in income stock to aim for £8,000 a year in passive revenue!

Income stocks form the core part of my portfolio, offering me passive income with minimal effort. But I'm reinvesting my…

Read more »