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Here’s why Mothercare’s share price is flying today

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Shares in mother and baby products retailer Mothercare (LSE: MTC) soared almost 30% in early trading this morning as the battered micro-cap announced a comprehensive rescue plan to the market. 

In crisis

Finding itself in a “perilous financial condition” as a result of increased competition and poorly performing stores, Mothercare revealed that it would refinance the business and restructure its UK portfolio through company voluntary arrangements (CVA) — agreements with creditors that allow a business to repay its debts over a fixed period of time.

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The company has proposed to raise £28m in July through the issue of new shares. Revised debt facilities of 67.5m (with a final maturity date of December 2020) were also disclosed along with £18m worth of loans from the company’s largest shareholders and a trade partner. The latter will allow Mothercare to meet its short-term liquidity requirements.

All told, this should provide the company with up to £113.5m of funding as it attempts to turn things around.

On top of this, Mothercare will accelerate the reduction of its store estate to reduce losses and save on rent. A total of 50 stores will go, leaving a portfolio of 78 by 2020. There will also be “material rent reductions” at 21 other stores.

With Interim Executive Chairman, Clive Whiley, stating that the potential for the brand “remains significant”, is it time to reconsider investing in Mothercare? Not unless you have the patience (and optimism) of a saint.

Today’s huge rise needs to be put in context. In a little under three years, stock in the Watford-based business has collapsed in price from 300p to 21p (before today) as its market share has been pretty much eradicated by online competitors, low-price retailers (e.g Primark) and supermarkets. How the company can possibly stage a meaningful recovery when its UK operation hasn’t delivered a profit in six years is beyond me. 

Those inspired by legendary value investor Benjamin Graham’s penchant for finding “cigarette butt” stocks will be drawn to Mothercare, but I think most investors should steer clear. A price-to-earnings (P/E) ratio of 9 for the current financial year looks enticing but — with no compensation for taking on so much capital risk — the suggestion that it remains anything but a value trap remains fanciful.

Today’s news may be enough to postpone its permanent inclusion in the growing list of high street casualties, but I’m still of the opinion that the death knell for Mothercare will eventually sound.

A safer bet

Despite its undeniably punchy valuation, lifestyle clothing brand Joules (LSE: JOUL) feels like a far safer alternative. 

January’s interim results revealed an 18.2% rise in revenue and 22.5% increase in underlying earnings before interest, tax, depreciation and amortisation (EBITDA). With the company now starting to make serious strides overseas, it’s no wonder management anticipates full-year profit being “slightly ahead” of analyst expectations. 

As mentioned, there’s just one problem. Since arriving on AIM two years ago, Joules’s stock has climbed almost 75% in value, leaving the company trading at 28 times earnings for the soon-to-be-over 2017/18 financial year. That said, a PEG ratio of 1.55 suggests growth hunters would still be getting a reasonable deal. In complete contrast to Mothercare, Joules also has net cash on its balance sheet.

While I wouldn’t rush to buy the shares right now, the retailer is certainly one to consider should markets correct once again.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Joules Group. 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.

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