Structurally-challenged mother and baby products purveyor Mothercare (MTC) has secured greater headroom on its debt facilities, allaying fears over the prospect of a deeply discounted rights issue. Relief at the news sends the bombed-out shares bouncing almost 20% (27.5p) higher to 166.25p.


Web chart - Mothercare - May 2014

Mothercare says lenders Barclays and HSBC this month extended its banking facilities from the £90 million refinancing deal struck in October to £100 million. Though the embattled retailer closed the year with £46.5 million net debt and flags uncertainty over demand for its products, it insists that with these new banking facilities in place, it 'will operate within the terms of its borrowing facilities and covenants for the foreseeable future'. Easing balance sheet fears, the welcome news suggests the small cap won't need to tap the market for rescue funds any time soon.


While the financing news is positive, full-year figures to 29 March still make for grim reading, albeit in-line with forecasts downgraded following a severe profit warning (8 Jan) blamed on fierce UK discounting and weak conditions overseas. Underlying pre-tax profits improved 61% to £9.5 million (2013: £5.9 million), yet Mothercare remained in the red to the tune of £26.3 million (2013: 23.9 million) after UK restructuring costs and a hefty negative currency swing and investors can sing for a dividend too.


International like-for-like sales rose 2.5%, yet this represents a slowdown from 5.6% last year in the growth engine of the business. Total UK sales fell 7.5% to £462.3 million and UK like-for-like sales were in negative territory again, easing 1.9%, although this was an improvement on the 3.6% decline posted a year earlier.


Guided by interim CEO Mark Newton-Jones following the shock exit of former LOVEFiLM boss Simon Calver earlier this year, Mothercare also insists the recovery seen in the fourth quarter has been maintained into this year's first quarter.


Competition from cheap online rivals and large supermarkets remains intense and Mothercare still faces an uphill task to restore its domestic business to profitability. Losses in the UK, where another 35 loss-makers were shuttered on a net basis last year, improved only slightly to £21.5 million.


Analyst reaction is mixed. Cantor Fitzgerald's Mike Dennis urges clients to 'sell' in a note gloomily entitled 'Expect more pain'. He writes: 'In our view, any management recovery plan might require more capital and higher lease provisions on an already weak balance sheet. Mothercare’s management will need to address the potential reduction in International profit (mainly FX), the role of Early Learning Centre (ELC) within the Mothercare group and how they plan to reduce UK losses aside from continuing to close loss making over rented high street stores. We expect downgrades to group trading profit in FY15E hence we reiterate our "sell" recommendation and price target of 114p based on 11 EV/EBIT (enterprise value to earnings before interest and tax) in FY16E.'


Numis Securities, with a 'hold' rating and 150p price target, continues to see 'significant long-term upside potential in the share price if the UK losses can be cauterised and the worth of the international business can be brought more clearly into view. The CEO recruitment progress is apparently progressing well but mainstream funds will likely await clarity on the strategy before reconsidering this opportunity.'

Issue Date: 22 May 2014