After the collapse of household names such as MFI, Woolworths and Land of Leather, the UK high street is becoming more and more like a morgue. Footfall in shopping centres is dwindling, the number of vacant stores is rising – creating anxious times for property landlords such as Land Securities – and thrifty consumers are trading down to cheaper products. Asda boss Andy Bond summed up the mood last week: “We are moving into a new age of austerity.” Therefore I would avoid the entire retail sector because it faces the mounting headwinds of shrinking family budgets, rising import costs from Asia (due to the weak pound) and decreasing sales densities. However, it’s unfair to tarnish the whole industry with the same brush because there are a few low-cost chains (eg, Aldi and Poundland) that are thriving in these tough times.
Mothercare (LSE: MTC), rated a BUY by Singer Capital
So what of Mothercare, the specialist children and baby products group and owner of the Early Learning Centre? Its niche merchandise is certainly not cheap, and hence won’t benefit much from the shift towards discounting. The bulls, however, argue that its products are recession-resistant. They argue that while consumers might stop buying 40-inch plasma TVs, they are unlikely to scrimp on kit for their children. But the world is changing. Mothercare may be a late-cycle business that will escape the early ravages of a downturn. But as sure as night follows day, when unemployment rises more and more families will opt for hand-me-downs instead of buying expensive designer prams and children’s toys.
What’s more, Mothercare’s recent better-than-expected results over Christmas were partly down to the demise of both Woolworths and Adams, which artificially lifted sales of its childrenswear and toys. But with big names such as Tesco, M&S and John Lewis piling on the pressure, repeating these results in 2009 will be more difficult. So, faced with a tough UK market, what next for Mothercare’s booming international business? After all, it has an impressive array of 603 outlets in 50 countries. But with the Russian ruble rapidly becoming rubble, and growth in other emerging markets slowing fast, I suspect conditions will soon deteriorate. At this tricky stage in the economic cycle, Mothercare’s board’s plan to expand aggressively overseas seems fraught with danger – foolhardy even.
The City is forecasting 2008/9 turnover and underlying EPS of £721m and 30.3p, jumping to £750m and 34.8p a year later. This puts the shares on stretching p/e multiples of 13.2 and 11.6 respectively. That’s equivalent to a 40% premium to the rest of the retail sector. I think this is unjustified, particularly as the implied 15% increase in 2009/10 earnings is a huge ask. It assumes that profitability will improve, which does not seem likely in this environment. Leave this stock on the shelf and find better bargains elsewhere.
Recommendation: SELL at 402.25p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.