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Why I’m avoiding Mothercare plc after today’s 25% slump

Shares in mother and baby goods retailer Mothercare (LSE: MTC) are crumbling this morning after the company warned once again on profits. 

Like many of its peers in the retail sector, Mothercare stumbled over the Christmas period as it struggled to win over shoppers. The group said its same-store UK sales fell 7.2% in the 12 weeks to December 30 compared with last year and online sales also slumped by 6.9% for the period.

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Following this dire trading, the company is expected to produce a result significantly below previous expectations for the year. Mothercare said adjusted pre-tax profits would be in the range of £1m to £5m in the year to May. This compares with a figure of £19.7m in 2017 and is more than 50% below the previous analyst estimate of £12m for the year ending 31 March 2018. 

Multiple headwinds 

According to CEO Mark Newton-Jones, the company suffered from its decision to hold off on price reductions until the end of sale season. Higher prices pushed consumers away but since the discounting started the firm has “seen good progress with strong sell through rates on Autumn Winter clearance lines.” However, these sales “carry lower margins and will lead to a further reduction in full-year margin as a result.

Going forward, management is not “anticipating any improvement in the short-term market conditions for the UK,” and as a result, it seems as if Mothercare’s outlook is going to be unclear for some time yet. 

Turnaround has hit a wall

Mothercare’s poor Christmas is somewhat of a surprise. Even though the whole retail industry is suffering from similar pressures, at the beginning of 2017 it looked as if the company’s efforts to rebuild itself for the modern retail world was paying off. As I covered last year, for the 52-week period to 25 March 2017, group sales expanded 6.2% year-on-year and digital efforts were starting to pay off. 

Nine months on and it looks as if the firm is going backwards. What’s surprising is that the company’s online sales are now sliding. Changing consumer shopping habits have resulted in most retailers reporting a fall in in-store sales over Christmas, although in most cases, higher online sales have helped offset the decline. For example, last week high street bellwether Next reported a 6.1% decline in store full price sales for the 54 days to 24 December, but online sales for the period jumped 13.6%, helping the group report positive overall sales growth for the period.

With sales falling across the board at Mothercare, it looks to me as if consumers have completely turned against the company’s offering. Management’s decision to stop discounting in the most important sales period of the year seems to have been a big error, and now the firm is having to dump its stock at knock-down prices. 

In today’s highly competitive retail environment, Mothercare can’t afford to be making these mistakes. That’s why I’m not catching this falling knife today; it looks as if the group’s turnaround has hit the rocks.

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Rupert Hargreaves owns shares in Next. 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.