JPMorgan downgrades Mothercare after profit warning
JPMorgan Cazenove downgraded Mothercare to ‘underweight’ from ‘neutral’ and slashed the price target to 40p from 82p on weak UK trading following the retailer’s profit warning on Monday.
The bank said that while some deterioration of the industry was expected, reported UK like-for-like sales down 7.2% and online sales down 7% in the third quarter were well below the -4% in retail fashion and +21% online sales growth reported by the industry.
“This leads us to think the brand is not strong enough to drive footfall and not competitive enough to win online. Whilst overseas sales are giving some signs of relief, we see losses in the UK mounting and expect more radical restructuring measures may be needed to improve profitability.”
JPM cut its estimate for FY18 pre-tax profit to £1.1m from £14.3m and for FY19 to £9.2m from £19.6m.
Mothercare cautioned on Monday that with no improvement expected for UK market conditions in the short term, adjusted group profit for the year is likely to be in the range of £1-5m, versus around £10m expected and after the group reported a £0.7m loss in November’s half-year results.
"In our UK business, we took a conscious decision to remain at full price to protect our brand positioning prior to Christmas but to then discount more heavily in the end of season sale," said chief executive Mark Newton-Jones.
"We have subsequently seen good progress with strong sell through rates on Autumn Winter clearance lines albeit these carry lower margins and will lead to a further reduction in full year margin as a result."
At 1550 GMT, the shares were up up 2.1% to 45.90p.