Can the Mothercare share price make a successful comeback?

Roland Head examines the latest update from Mothercare plc (LON:MTC) and asks if the shares could be a recovery play.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When I last wrote about troubled retailer Mothercare (LSE: MTC) in December, I suggested that things might be about to get much worse. Unfortunately they have.

The group’s shares have fallen by nearly 75% since my last article, as further updates have revealed continued poor trading.

During the 12 weeks to 30 December, UK like-for-like sales fell by 7.2%, while UK online sales fell 6.9%. International sales were 3% lower during the period, excluding currency effects.

The good news is that the firm’s sales performance did improve slightly during the final quarter of the firm’s financial year, which runs to late March. UK like-for-like sales only fell by 2.8% during this period, while UK online sales returned to growth, rising by 2.1%.

However, international sales continued to worsen, falling by 3.7% during the final quarter. Full-year sales for the whole group are expected to be 1.9% lower than last year.

More shareholder cash required?

Despite raising £100m from shareholders in 2014, Mothercare’s net debt was expected to be about £50m at the end of March. As of 12 April, the company remained in discussion with lenders about refinancing.

One reason for this delay may be that lenders are waiting for the firm’s new chief executive, David Wood, to produce a fresh turnaround plan. Recent press reports suggest that this might include a company voluntary arrangement (CVA) to allow the firm to close about 47 of its 143 stores.

If this happens, I’d also expect the lenders to require an equity fundraising to improve the group’s cash position. Mr Wood may have been referring to this in comments on 12 April, when he said that Mothercare was continuing “to explore additional sources of funding”.

A glimmer of hope?

Looking ahead, broker forecasts suggest that adjusted earnings could recover to 2.4p per share in 2018/19. This gives the stock a 2018/19 forecast P/E of about 7.5.

This might seem cheap, but if new shares are issued as part of a restructuring, existing shareholders could face significant dilution. I think it makes sense to wait until the company has completed any refinancing before considering whether to invest.

This is how it could work

Mothercare isn’t the only well-known retailer with financial problems. Flooring specialist Carpetright (LSE: CPR) has seen its share price fall by more than 70% since it reported a “sharp deterioration in UK trade” with a “significant impact on profitability” in January.

However, Carpetright appears to be several steps closer to a solution than Mothercare. On Thursday, the company announced details of a CVA proposal that would allow it to close 92 sites, and agree a rent reduction on a further 113 sites.

If the firm’s landlords approve this plan, then management also plans to raise £60m through an equity placing and open offer. This cash will be used to help reduce debt and fund the group’s turnaround plans.

I’m not rushing in

Without its lossmaking stores, Carpetright’s profitability could improve significantly. This could become an attractive recovery play.

The problem for small investors like us is that if the plan is approved, most of the new shares will be issued to institutional buyers. They may well be sold at a big discount to the current share price. If this happens, the existing shares could fall sharply.

On balance I think it’s probably still too soon to buy, but I’ll be watching this situation with interest.

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 assessed. Consider taking independent financial advice.

Roland Head has no position in any of the 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »