BULL POINTS:
■ Rapid overseas expansion
■ Cash pile
BEAR POINTS:
■ Underlying UK sales falling
■ No like-for-like growth overseas
■ Profit margins under pressure
■ Shares expensively rated for a retailer
Admittedly, fears of a double-dip recession are looking overdone - the UK's third-quarter economic growth rate, for example, easily beat economists' predictions to come in at 0.8 per cent. But it's not obvious that will bolster consumer confidence in a big way. In fact, earlier this month the Office for National Statistics reported that September's UK retail sales volumes had slipped 0.2 per month on month. Meanwhile the government's plan to slash public spending, perhaps generating 490,000 public sector job losses over four years, could leave the UK's retailers facing bleak prospects in the run-up to Christmas.
| IC TIP RATING | |
|---|---|
| Risk rating | HIGH |
| Timescale | SHORT TERM |
| What do these mean? Find out in our | |
Such an uncertain backdrop spells bad news for children's goods retailer Mothercare, which operates through its Early Learning Centres and Mothercare outlets. The group's trading update for the first half of 201-011 revealed a dull picture. Like-for-like sales in the UK, where approaching 80 per cent of Mothercare's revenue is generated, fell 3.8 per cent in the six months to 9 October. "The UK consumer environment remains uncertain," said chief executive Ben Gordon, "Accordingly, we are planning cautiously for the important second half."
That uninspiring performance in the UK prompted some City analysts to hack away at their full-year profits forecasts. Broker FinnCap trimmed 5 per cent from its earnings estimate for the year to end-March 2011. Another broker, Numis Securities, expects Mothercare's gross profit margin to drop by a percentage point and, as a result, cut its full-year earnings estimate by 7 per cent. Meanwhile, John Stevenson, an analyst at broker Peel Hunt, decided not to revisit his full-year estimates but he isn't too confident about the group's prospects. "We still fear for peak sales and margin performance in the UK," he said.
| ORD PRICE: | 532p | MARKET VALUE: | £469m | |
| TOUCH: | 532-533p | 12-MONTH HIGH: | 694p | LOW: 490p |
| DIVIDEND YIELD: | 3.5% | PE RATIO: | 16 | |
| NET ASSET VALUE: | 214p | NET CASH: | £38.5m | |
| Year to end-Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2007 | 499 | 18.9 | 20.9 | 10.0 |
| 2008 | 677 | 4.5 | 0.1 | 12.0 |
| 2009 | 724 | 42.0 | 36.2 | 14.5 |
| 2010 | 766 | 32.5 | 28.0 | 16.8 |
| 2011* | 809 | 41.1 | 33.8 | 18.5 |
| % change | +6 | +26 | +21 | +10 |
*KBC Peel Hunt estimates (profits and earnings not comparable with historic figures) Normal market size: 2,000 Matched bargain trading Beta: 0.4 | ||||
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In fact, only the group's international operations - it boasts outlets in such exotic locations as India, China, Singapore and the United Arab Emirates - offered good news. Mothercare's international retail sales rose by 17 per cent in the first half. That growth reflects the fast pace of Mothercare's international expansion efforts, and the group now has 800 overseas stores. Moreover, Mothercare has opened 112 new stores so far this year and management expects that figure to rise to at least 150 by the year-end. Yet, on a like-for-like basis, international sales growth in the first half was actually flat, which may be another cause for concern.
Still, at a time when there are plenty of retailers around that are struggling with big debt burdens, Mothercare has net cash - £38.5m at the end of March - and Numis Securities thinks that figure will rise to £41.5m by end-March 2011. And a prospective dividend yield of 3.6 per cent, based on KBC Peel Hunt's estimated full-year payout, is reasonable enough, if not marvellous.
