Mothercare – Does rebirth offer new growth chances?

When you get it wrong, the best thing to do is stop, reconsider and then plan another route.

Well Mothercare (LON:MTC) certainly got it wrong in 2018 and since then its management has been working on nurturing a better infant.

Sixty years old and entering its second phase of growth

The group started way back in 1961 and focused on selling pushchairs, nursery furniture and maternity clothing.

It extended its range into children’s clothing up to the age of eight years old, then into furniture and home furnishings, bedding, feeding, bathing and travel equipment.

It went public in 1972 and merged with Terence Conran’s Habitat retail chain in 1982 to form Habitat Mothercare.

Four years later, it became part of the Storehouse group alongside British Home Stores.

That group underwent some rationalisation in the late 1990s and by 2000 Mothercare became the sole brand.

The group gradually lost its way, such that by 2018 a restructuring programme was put in play.

The new plan starts to come together

The Mothercare UK retail stores and the group’s online platform were closed early last year.

Since then, the group’s Management has transitioned the business to provide a sustainable, operationally efficient, capital-light platform.

It is now focused on the growth of brand management and the design, development and sourcing of products.

That product is required ‎to support the group’s international franchise partners, who have over 700 dedicated stores spread across 37 countries globally.

Franchise partnerships are the way forward

No longer does the company have the burden of a UK store estate or warehousing and their associated operational costs.

Its business today derives its operating profit from royalties that are payable on its global franchise partners’ retail sales.

Those 18 partners operate from around 2m sq ft of retail space worldwide.

Its cover of the world is not enough

And yet it is still only scratching its sales potential – when rated by wealth and birth rate, it does no business with seven out of the top ten baby markets in the world.

The plan now in operation is to extend the company’s brand reach through wholesale, licensing and online markets globally.

As it expands its global footprint Mothercare will really start to see the benefits shining through from its new sustainable, capital light franchising model, combined with a new stock purchasing and funding basis.

In the Autumn of last year, the group agreed a ten-year partnership with Boots UK as the company’s exclusive franchise partner for the UK and the Republic of Ireland as well as for its online operations.

It also has franchise partners in Europe, the Middle East, the Far East and in China.

New season getting good vibes

Already the group is getting good franchise partner feedback on its Spring/Summer 2022 season ranges.

Over the last year or so, the group has overhauled its entire product range and modified its distribution and logistics operations.

It has removed complexity and reduce operational costs at the same time as seeking to drive the company’s sales growth.

Good equity support

The group today has some 563.84m shares in issue, of which Richard Griffiths controls 33.2% of the equity.

Other large holders include Lombard Odier Asset Management (19.4%), M&G Investment Management (12.6%), DC Thomson Pension Fund (10.1%), UBS Asset Management (4.48%), Jupiter Asset Management (2.88%), Majedie Asset Management (2.65%), Northern Trust Global Investments (2.55%), Hargreaves Lansdown Stockbrokers (1.99%), and Ninety One UK (1.73%).

Last year’s results

In the year to end March 2021 the group saw its revenues halve from £164.7m to just £85.8m, while the adjusted pre-tax losses increased from £5.5m to £8.7m.

Of those revenues Europe made up £46.2m, the Middle East £20.1m, with Asia covering £19.5m of sales.

By 27 March this year, the group’s borrowings had been more than halved from £40.8m to just £19m.

Broker’s estimates, aiming for 20p

At finnCap, the group’s brokers, its analysts Nigel Parson and Michael Clifton, estimate that the current year to end March 2022 will see sales of £81m, helping to bring the group round into profits of some £6.9m, worth 1p per share in earnings.

For the 2023 year, they go for similar revenues, but with a more than doubled adjusted pre-tax profit of £14.6m, worth 2.1p in earnings per share.

Cautiously, this far ahead, they are estimating revenues of £78m in 2024, while making £18.2m profits, worth 2.5p per share in earnings.

The brokers have now put out a price objective of 20p a share.

Possibly a further Trading Update at AGM time

The group will be holding its AGM on Thursday 9 September.

At that time I would hope that Clive Whiley, the very able Chairman who was appointed to the Board in April 2018 to reorganise the group, will make an updated statement on current year trading and on just how well the group’s current season ranges are selling.

My View

Do not underestimate this modified group. Its new asset light business model should do it very well over the next few years.

I am convinced that as the current year proceeds the group’s shares will improve in price from the current 15p.

I now set an early Target Price of 18p, but I do see them going a great deal higher in due course