Why Mothercare plc Has Plummeted This Morning

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

mothercare.mtcWhat: The share price of Mothercare (LSE: MTC) has plummeted 26% so far today, as almost 80m new shares were admitted to trading this morning, following the company’s announcement on 23 September of a rights issue, aimed at raising around £100m.

So What: Mothercare said the rights issue was necessary to enable it to deliver on its new strategic plan, which is aimed turning the UK business around and transforming the company into a “digitally-led business”.

What Now: About £25m of the proceeds of the rights issue will be used to implement a store closure programme, whilst a further £20m will be devoted to store refurbishment.

A substantial part of the cash raised will go on reducing the group’s absolute level of debt, with £40m being used for the full repayment of the Group’s existing term loan. And approximately £10m will be used to invest in new systems and technology and the modernisation of the company’s IT infrastructure.

Any shortfall in the amount of money required to implement the new strategy will be met from operating cash flow generated by the business.

Commenting on the rights issue, CEO Mark Newton-Jones said:

We have set out our strategic plans for the turnaround of Mothercare and ELC in the UK. By modernising and transforming the UK into a digitally-led business supported by a modern store estate we will underpin the growth of the Group’s successful International business. Our ambition is for Mothercare to become the leading global retailer for parents and young children. The support of our shareholders will allow us to deliver on this ambition. I am excited about the prospects for this company and the opportunity we have to provide great products, service and advice to our customers worldwide.

However, unless Mothercare can begin to unlock the value that the board believes still exists in the company — primarily in its international operations — shareholder support could well be in increasingly short supply.

With today’s fall, Mothercare’s share price is now down 56% on this time last year, versus an essentially flat FTSE 100 index (it’s slipped 0.8%). And the longer-term story make for even worse reading, with Mothercare crashing 73%, whilst the FTSE 100 has risen 24%.

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Jon Wallis 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.