Mothercare's (MTC) shares crashed by a fifth on the day of the company's latest trading update. There wasn't a profit warning as such, but chief executive Mark Newton-Jones admitted international markets will remain challenging during the current financial year. Retail sales across the international division fell 10.8 per cent during the final quarter, which the company blamed on the low oil price restraining Middle East consumer sentiment, weak buyer confidence in Asia and adverse currency movements across Europe and Latin America.
The domestic picture is a tad brighter. UK like-for-like sales rose 2.1 per cent during the fourth quarter, although that was largely supported by online sales which rose 5.6 per cent during the same period. Total UK sales eked out a 0.8 per cent improvement despite a 6.4 per cent reduction in space year on year. The company ended the quarter with 170 stores trading across the UK, 56 of which have been converted into a new format to better appeal to the growing customer base personified by the middle class, 'yummy mummy' customer.
Mr Newton-Jones is trying his best to remain optimistic about prospects for the company abroad. Although he expects certain markets to remain soft, he said there are still opportunities to grow space and to modernise Mothercare's branding efforts overseas. Overall, he expects underlying profit for the 2016 financial year to fall within the range of current market expectations.
Peel Hunt says...
Buy. We expect the shares to be hit hard reflecting brokers' downgrades for the international division. But we view this as a cyclical setback to the international business rather than a fundamental weakness. Indeed, the strength of the company's franchise model means Mothercare is well protected from an operational gearing perspective. Looking ahead, we believe plans for a transactional online platform across the international business will prove a major catalyst for the division. We forecast pre-tax profit of £19.2m and EPS of 8.5p for the year to March 2016, compared with £13m and 7.8p in FY2015, and would buy on weakness.
Numis says...
Add. The drop in international sales shows a significant deterioration compared with recent quarters. We therefore saw fit to trim our FY2016 pre-tax profit forecasts by 2 per cent to reflect this. We had previously assumed a resumption of more positive trends abroad, but we now view this as too optimistic, particularly given the ongoing weakness in petro-economics. Our pre-tax profit number has therefore been reduced by 35 per cent. This was clearly disappointing, but we believe it correctly reflects external macroeconomic pressures and we still view the Mothercare brand as a preferred franchise partner with long-term growth potential.
