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This retailer could be a top recovery play in 2017

The leading global retailer for parents and young children, Mothercare (LSE: MTC), issued a very positive trading update earlier this month, with a return to sales growth here in the UK, and international sales continuing to benefit from favourable currency movements, albeit with mixed underlying performance.

Currency tailwinds

In its third quarter trading update, the Watford-based small-cap retailer reported a 1% rise in like-for-like sales in the UK, helped by a 5.5% uplift in online sales, which now represents around 40% of total UK revenue. International retail sales were down 5.9% on a constant currency basis, but up 13.2% in actual currency, reflecting ongoing foreign exchange tailwinds.

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It’s nice to see the company’s UK business returning to growth after a difficult summer trading period, as management continues to focus on product improvement and full price sales. However, I think international sales figures were flattered by favourable exchange rates, and the fact remains that underlying performance continues to be mixed in spite of many markets returning to growth.

Looking cheap

Whilst performance in both China and Russia improved, trading conditions remained challenging in the Middle East. Nevertheless, I’m encouraged by the fact that the company is working closely with its international partners to help modernise their businesses and that management is still keen to seize on opportunities in both new and existing markets around the world.

Analysts in the Square Mile are expecting Mothercare to reverse the sales decline that began in 2013, and to post a rise in full year revenues for the first time in five years. Pre-tax profits for the full year to March are forecast to double to £19.66m, with double-digit underlying earnings growth predicted for the medium term, leaving the shares looking cheap at just 10 times forecast earnings by FY 2019.

Turnaround plan

Meanwhile, Marks & Spencer (LSE: MKS) is another London-listed retailer that’s been under the cosh in recent times. Back in May, the FTSE 100 multinational endured a share price collapse that saw the value of its shares fall to seven-year lows following the release of its full year results for FY 2016. Pre-tax profits slumped by 18.5%, and management warned that current year profits would be hit by plans to turn around the clothing business.

The retailer’s latest third quarter update was more positive, with better-than-expected trading in the run-up to Christmas, and revenue up 4.3% on a constant currency basis, helped by a strong performance in clothing and home sales. The company’s turnaround plan may be gathering pace, but brokers are still anticipating a 17% dip in earnings for the full year to March, with no underlying earnings growth in sight until at least FY 2019.

In contrast to Mothercare, I think it’s still too soon to buy Marks & Spencer as a recovery play, but existing shareholders should hold on for the chunky dividends, which currently yield 5.4%.

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Bilaal Mohamed 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.

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