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.
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.