- Middle East sales down 20%
- Adjusted profits rise 17%
- Refinancing a positive catalyst for penny stock
Now a specialist global franchise business, having shuttered its remaining UK stores before the Covid pandemic struck, cost-cutting helped Mothercare (MTC:AIM) deliver a 17% increase in adjusted pre-tax profit for the half to 23 September 2023.
Unfortunately, shares in the mother and baby products brand cheapened 2% to 4.7p, close to their all-time low, as investors fretted over a 14% drop in franchisee system sales amid a slowdown in the Middle East, where geopolitical events are hurting consumer sentiment.
WHY DID SALES DIP 15%?
Mothercare’s adjusted pre-tax profit from operations rose 17% to £3.4 million in the first half despite a 15% drop in franchise partners’ international retail sales to £137.2 million.
This revenue reverse reflected ‘difficult trading conditions in the Middle East’, where sales slumped by 20% amid rising geopolitical turbulence as well as slow retailer destocking and the introduction of new leisure activities competing for consumers’ cash.
Mothercare had already made a painful exit from Russia, previously a key market for sales in reaction to the invasion of Ukraine.
WHAT DID THE CHAIRMAN SAY?
Chairman Clive Whiley said the results were ‘testament to our continued drive to preserve the strength of the Mothercare brand in a fast changing retail and macroeconomic trading environment. Against significant headwinds in the Middle East, one of our core markets, we are pleased that our business model and disciplined approach to cost has resulted in an increase in profitability for the first half.’
However, Mothercare said it was ‘acutely aware’ of the pressure on franchise partners’ profitability and their need to reduce costs, which will ‘likely lead to further reductions in our store footprint in some regions’.
The company is working closely with key partners to help with their recovery, but warned it doesn’t expect their ‘combined efforts to offset fully this impact on the group results for the financial year to March 2024 and beyond’.
Mothercare’s net debt increased by £3 million from the year-end to £15.8 million as at 23 September and refinancing this debt pile is a top priority for management.
The company continues to explore options to reduce a pension scheme deficit amounting to £35 million as of 31 March 2023, although this deficit has fallen from £124.5 million since the start of the pandemic.
THE CAVENDISH VIEW
Reiterating its 15p price target for the stock, analysts at Cavendish said the results ‘demonstrate the resilience that Mothercare has built into its business model’, with adjusted EBITDA rising 12% despite declining franchisee system sales.
The broker added: ‘Mothercare continues to explore refinancing solutions, the final piece of the long-running balance sheet reconstruction project. Lender Gordon Bros remains supportive, and we anticipate a satisfactory outcome. Once this exercise is complete, then Mothercare can increase its focus on growing and diversifying its income streams with a business model that has been hard forged through adversity.’
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