Should You Sell Mothercare plc And Poundland Group PLC & Buy Halfords Group plc After Today’s News?

Shares in Mothercare (LSE: MTC) fell by as much as 19% this morning, after the firm said that sales in its international stores fell by 10.8% during the fourth quarter.

A 0.8% increase in UK sales wasn’t enough to offset this drop. This means that Mothercare’s worldwide sales fell by 6.7% during the 11 weeks to 26 March, compared to the same period last year.

To be fair, the firm’s UK figures are slightly better than they appear. Mothercare has been closing lossmaking stores in the UK, so the rise in UK sales was achieved against a 6.4% reduction in retail space. UK like-for-like sales rose by 2.1%, while online sales rose by 5.6%.

However, international sales have been hit hard by the oil crash in the Middle East and by weaker consumer confidence in Asia, especially in China. There’s no way for us to know whether conditions will worsen or improve this year.

Mothercare expects full year results for the 2015/16 financial year to be within current forecasts. This puts the shares on a 2015/16 forecast P/E of about 16. The real question is whether expectations for next year will be downgraded when the group reports its results. I suspect they might be.

Although Mothercare is in much better shape than it was a couple of years ago, I’m not sure how much growth potential this business really has.

Is there more profit at home?

Unfortunately for shareholders in Poundland Group (LSE: PLND), their business wasn’t able to replicate Mothercare’s success with UK customers.

Poundland said today that although UK sales rose by 17.9% last year, this was due to opening new stores and the integration of the 99p Stores’ chain. UK like-for-like sales fell by 3.9% during the second half of the year, and by 4.9% during the final quarter.

This worsening trend isn’t very encouraging, in my view. Nor is Poundland’s guidance that underlying pre-tax profits are expected to be “broadly in line” with expectations. Use of the word broadly is often a code for slightly lower than expected.

Poundland still has some attractive characteristics. The group has net cash and has historically generated plenty of free cash flow. But with UK stores reporting falling sales, profit margins and cash generation could come under pressure.

Poundland shares now trade on 16 times 2016 forecast earnings. I’m not sure this is a good time to buy.

A better alternative?

One of the stars of this week has been Halfords Group (LSE: HFD). Shares in the car accessories and cycle retailer rose by 10% on Wednesday after it reported a 3.1% increase in fourth quarter sales.

Booming sales of in-car cameras, known as dash cams, helped lift motoring-related sales by 3.5% during the fourth quarter, and by 2.5% last year.

Another attraction is Halfords’ car servicing and repair offering, under the Autocentres brand. Autocentres sales rose by 4.1% last year, and tend to have higher profit margins than the retail stores.

After Wednesday’s gains, Halfords shares trade on about 13 times 2016/17 forecast earnings, with a 4% forecast yield. They aren’t the bargain they were in January, but in my view they’re still a reasonable buy.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.