Investment View: Mothercare should be thriving, but it needs a miracle

Mothercare: Our View: Sell. Price: 269p (+4p)
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The Independent Online

It's fairly standard practice in the City when you have a business like Mothercare, whose prime market is women, to hand the keys to the CEO's office to a middle-aged bloke.

That is not to say that middle-aged men can't run this sort of business, just as it's not to say that a woman can't run, say, a football club. But the utter dominance of white, middle-aged, middle-class males at the top levels of business generally does mean you are rather limiting your pool of experience.

You can easily miss the obvious, such as one of Mothercare's big issues. For many years the stores just didn't work. The bosses tried to fill as much space as possible with shelves containing product, because that's more pounds per square foot on a spreadsheet. They didn't see the problem this caused: you couldn't push a pram around. So customers pushed their prams elsewhere.

Oddly, however, having appointed another white, middle-class male to the top job, and an internet guy as well in the form of LoveFilm's Simon Calver, things seem to be turning around.

The key figure to look at is like-for-like sales: in other words, sales at shops open at least a year. It excludes the positive impact on overall sales of new openings and the negative impact of closing, say, unprofitable stores (Mr Calver is shutting about a third of the UK shops).

At Mothercare, like-for-like UK sales edged up 0.3 per cent in the third quarter of the year, which is hardly something to celebrate, but comes as an extremely rare bit of good news for a chain which had reported declines of 6.7 per cent and 8.2 per cent in the previous two quarters.

There was something of a sting in the tail, it should be said. Mr Calver warned that achieving Mothercare's full-year international sales growth target of 20 per cent will be "a challenge". So, in other words, it ain't going to happen unless there's a miracle. It's currently running about 11 per cent.

Although that's not too shabby, it is somewhat disappointing, because faced with cut-throat competition from the likes of Kiddicare, John Lewis, Morrison's and especially the internet, the international part of the operation has been propping up the business. The chain has 1,100 branches in 60 countries, and just as it shuts shops in the UK it is opening them in places where there is economic growth, such as the Middle East and various other fast-growing corners of the globe.

There are also reasons not to get over-excited by the UK numbers. As the broker Charles Stanley has pointed out, the comparative period last year was a weak one, the weather has been odd, the clothes lines have been "re-priced". So investors should be a little cautious before making a firm judgement and saying the turnaround is in full effect.

Fair play to Mr Calver and his team for getting things moving, and appearing to deliver on his promises quickly.

But the shares have enjoyed a very strong run this year, outperforming the FTSE All Share index by a third. They rose by 10 per cent on the back of last week's trading statement and then made more gains.

As a result those shares now trade on more than 40 times forecast earnings for the year ending 31 March. OK, so the company is in a transitional period. But they sit on 14 times 2014 forecast earnings. With the international growth not as exciting as promised, and the UK stores having to complete their turnaround in a tough economic environment, the valuation is starting to look stretched.

Mothercare really ought to be a good business. As a parent, it used to be one's first port of call. It stopped being that because rivals were cheaper and Mothercare's stores and service proved to be less than stellar.

Mr Calver says his new "transformation and growth" strategy will "put the customer first", which isn't so much a strategy as it is something that ought to underlie everything a successful retailer does.

I'd want to see more solid evidence that the company is doing that to invest in the shares at their current level. Sell.