Shares in mother and baby products brand Mothercare (MTC:AIM) were marked up 9% to 19.95p after Numis Securities re-initiated coverage on the stock with a ‘buy’ rating and a 24p price target.
The broker sees ‘much to like’ at Mothercare as its ‘turnaround story is established and proven out’ and expects the restructured company to swing from an £8.5 million loss to £6.1 million pre-tax profit in the year to March 2022, with pre-tax profits expected to rise towards £15 million by full year 2024.
‘BORN AND RAISED’
In a note headed ‘Born and Raised’, Numis’ Deirdre Mullaney explains that today, the British heritage brand founded in 1961 and listed on the stock market in 1972 ‘looks very different to what it once was’.
Mothercare’s UK retail operations were dissolved through a late 2019 administration, which didn’t impact the trading or operations of Mothercare plc. An associated refinancing package was agreed and a group restructuring has subsequently been completed.
These days, the Mothercare brand is now solely distributed through a global franchise network covering 700-plus Mothercare stores operated by 18 partners in 37 countries, Russia, Saudi Arabia, the UAE, China, India and Indonesia among them.
On home turf, the Mothercare brand exists through a franchise deal struck with Boots, the high street chemist with over 2,500 UK stores. Of these, 416 sell a range of Mothercare products, with 10 featuring more extensive “store-within-a-store” concepts.
‘Given the multiple issues facing the Boots business in the wake of Covid, we don’t expect UK brand sales to pick up to a material level relative to the group in our forecasts,’ explains Numis.
LEAN AND MEAN
‘With restructuring work all but complete, a leaner and more focussed group is looking to return the brand to growth,’ says the broker,’ writes Numis, noting that new long-term franchise agreements have been signed with major partners, ‘unlocking a more cost-effective and simpler way of working. Greater focus on product design and sourcing for an international audience should unlock product improvements to support improved share trends for current partners and attract new partners.’
RECOVERING FROM COVID
Mothercare’s recent first half results revealed an EBITDA (earnings before interest, tax, depreciation and amortisation) of £5.6 million from a base of £184 million of retail sales, though the broker cautions that ‘Covid continues to provide a further near-term headwind. Demand for mother and baby products has fallen and it’s largely store-based partners aren’t necessarily best positioned to hold or grow share against a backdrop of store closures and reduced consumer mobility.’
Nevertheless, ‘the operational gearing in the business isn’t what it once was, and a lean cost base is providing protection against these headwinds, with the business remaining EBITDA profitable through full year 2022 to date despite these headwinds.’
Numis also stresses that Mothercare’s balance sheet looks ‘sufficiently repaired, with a path to repaying the modest amount of remaining debt in the business whilst also reducing the pension deficit that is the remaining legacy of the UK operations. A sustained recovery in profitability should lead to robust cash generation and afford the business more flexibility to return cash or seek opportunities for growth.’
Mothercare is on the hunt for a new CEO, after interim-CEO (and previous CFO) Glyn Hughes left the business in June 2020. In the meantime, the business has been led by CFO Andrew Cook, COO Kevin Rusling with oversight from chairman Clive Whiley.
