Investment View: Mothercare is being nurtured back to health

  • @TheIndyBusiness

Is Simon Calver's TLC going to help Mothercare to grow up into something better than the truculent child it has been for the last few years? I'm beginning to think that there's a chance. I was critical of Mr Calver's appointment: An internet guy for a flailing mother-and-baby chain with a big bricks and mortar estate (he made his name at LoveFilm). Hardly the obvious choice. That's not least because many of the chain's recent failures seemed to stem in part from the company failing to recognise what its customer base wanted and needed from those shops (you'd know if you'd ever tried to push a pram around the tightly packed shelves).

When I talked to him, however, he appeared to have grasped the problem and was willing to put himself on the spot by offering to demonstrate that he has listened to some of the chief criticisms I've levelled. I'm going to take him up on that and will report back the next time I update on Mothercare.

On the face of it, his numbers still don't look great. Like-for-like sales, which excludes the impact of store closures (and there have been a lot), looking at stores open at least a year, fell by 7.4 per cent in the 12 weeks to 12 January. In the 41 weeks to 12 January they fell 6.5 per cent, so the decline appears to be accelerating.

The international business is still motoring, with sales up 14.8 per cent in the most recent 12 weeks, 15.1 per cent over the 41 weeks. And new stores are opening all the time.

UK online, however, was sluggish, with growth of just 0.9 per cent.

Mr Calver explains the grim-looking UK figures as being partly the consequence of aggressive discounting which produced a late surge that flattered last year's figures in comparison to this year's. He says the group has since abandoned the practice of pricing things high and then cutting the price heavily at which time a diminishing band of customers would pile in.

Instead, the watchword is value – utilising global clout to do things like consistently selling three sleep suits for £7 rather than £14 at a profit throughout the year rather than just at sale time.

Mr Calver says he's slightly ahead of plan in his three-year turnaround programme. Those like-for-like sales are projected to fall by 3 per cent in the 2013/2014 period, then pick up, when the company will start more aggressive marketing of its wares.

It may need to. The supermarkets are always a threat. John Lewis has been particularly good in this sphere, and there are other competitors knocking on the door.

That said, Mothercare could still come good if Mr Calver continues to push in the right direction, and those overseas businesses are something not many UK retailers can rival. I'm beginning to think it is time to take a punt on this stock. But it remains a big risk, so I make it only a speculative buy.

Another company where the action is overseas is Burberry, which had something of a rocky 12 months after it was made one of The Independent's 10 to follow in 2012. It finished the year up, but only just.

Things have perked up a bit since its recent trading statement, however, which showed sales ahead 6 per cent at stores open at least a year. The group continues to open new outlets at places where a luxury retailer ought to be – if you visit Shanghai this year you'll probably pass one of them.

The shares aren't cheap, trading on just under 21 times earnings for the year to 31 March, falling to just over 18 times in 2014, with a prospective yield of just over 2 per cent. But I think these shares are worth holding for the long-term.

Not so Home Retail Group, the slightly odd combination of Argos and the DIY retailer Homebase. HRG shares have been in vogue after it unveiled a better-than-expected 2.7 per cent rise in sales at Argos for the 18 weeks to January, fuelled by booming demand for tablet computers and the departure of competitors from the scene. Earnings estimates have been boosted, by £10m or so. However, Homebase continues to get squeezed. The DIY retailer offers a much more friendly service than its rival B&Q, but margins are falling, sales are falling, and the DIY market is contracting. Last year's comparatives were also weak, making this year's figures look better.

For the year to the end of February the shares trade on 23 times earnings, falling to about 18 times (although estimates are being raised). This is another recovery play but note that the fall in multiple for next year isn't as steep as that at Mothercare, and HRG operates in a tougher space with the competitive threat arguably greater. Sell.