The UK high street retailer has become an international force to be reckoned with.
It's been a newsy spell for Mothercare (LSE: MTC). It kicked off a couple of weeks ago with a bit of impromptu celebrity endorsement, when proud mum Danni Minogue took newborn son Ethan on his first outing -- to Mothercare's Melbourne branch.
Since then, the company has held its AGM, issued a trading statement, disclosed that it has bought 'yummy mummy' brand Blooming Marvellous, and announced that it is in discussions to acquire a 25% stake in the company that operates the Mothercare and Early Learning Centre franchises in Australia and New Zealand.
Finally, last Monday, the company issued a big slug of share options to its directors to reward a three-year profit increase of 65% and a shareholder return 120% ahead of the FTSE General Retailers index
Mothercare Story:
Mothercare has come a long way since its 'terrible twos' -- 2002, the year that saw a string of profit warnings, and ultimately the ousting of the chief executive, finance director and chairman.
The company made a £25m loss in its 2002/03 financial year. For shareholders, who had also seen their dividend axed, a £1m pay-off to the departing directors rubbed salt into the wound.
Still, every cloud has a silver lining. Mothercare's came in the shape of new chief executive Ben Gordon, who arrived from the Walt Disney Company, where he had been managing director of the Disney Store chain in the Europe and Asia-Pacific region.
The youthful Mr Gordon implemented a three-year recovery plan. More importantly, he had an ambitious longer-term vision: to transform what was an uncharismatic UK retailer with a few international outpost stores into a genuinely global brand.
The ex-Disney man sprinkled his stardust and scripted a Cinderella story for Mothercare.
Taking It Global:
Today the Mothercare group has two iconic world-class brands: Mothercare itself, and the Early Learning Centre, which it acquired for £85m in 2007.
Subsequent smaller acquisitions, of social networking site Gurgle.com and maternity-wear brand Blooming Marvellous, further widen the group's offering across the parenting and pre-parenting spectrum.
Channels to market have also been expanded and now include: out-of-town 'parenting centres', in-home and in-store internet ordering, a new wholesale business, and a rapidly growing international franchise network.
Since Ben Gordon took over as chief executive, group turnover has steadily increased, from £432m to £766m; international sales, as a proportion of total sales, have more than doubled, from 11% to 23%; and the group now has 1,167 stores worldwide in 53 countries.
That may sound like a sizeable international footprint, but Mothercare has only just begun to tap its potential as a global brand. It plans to open at least 100 new overseas stores every year 'for the foreseeable future.'
Present Value:
At the moment the market is choosing to focus on short-term headwinds facing Mothercare's UK operations.
The company's recent trading statement, covering the first quarter, reported continuing strong growth in international sales (+20%) but UK like-for-like sales down 4.1% and an 'uncertain UK consumer environment.'
Whilst the company said that UK margin pressures would be at least partly offset by cost savings, analysts have downgraded their earnings forecasts, fearing tough competition from Tesco (LSE: TSCO), Asda and Marks and Spencer's (LSE: MKS) rejuvenated childrenswear business.
At the current share price of 521p a revised consensus earnings-per-share (EPS) forecast of around 36p for 2010/11 puts the company on a price/earnings (P/E) ratio of between 14 and 15. Forecast earnings growth of 15% suggests that Mothercare is only around fair value on the basis of its price/earnings to growth (PEG) ratio.
For 2011/12, though, the P/E falls to 12 with earnings growth forecast in the high teens. A share price of 521p looks a reasonable price to pay for that level of growth and you get a dividend at an above-average yield thrown in.
In my view the current share-price weakness, reflecting the market's jitteriness about the company's UK operations in the short term, offers a decent entry point for investors with a longer-term horizon – even though there's a chance of some further downward revision of earnings forecasts and/or share-price weakness in the immediate future.
Cash Flow and Existing Business:
It seems to me that the company has already proved Mothercare/Early Learning Centre as a viable global brand and is now in a position to fully exploit that over the coming decade.
Strong cash flow has seen rising net cash on the balance sheet, and although a sizeable pension deficit lurks in the background, a trend of increasing cash generation will underpin further international expansion and brand development.
Mothercare could also increase its share of the profits from its existing international operations by the relatively low-risk strategy of investing in its franchise companies. That's what the discussion to acquire a 25% stake in the Australia/New Zealand operator is all about. In the giant China and India markets the franchise models are already structured as joint ventures to give Mothercare a bigger slice of the profits cake.
Finally, Mothercare's fledgling wholesale business and the nascent development of online shopping in overseas markets both have huge potential to contribute to growth in the coming years.
The Future:
Perhaps the biggest challenge for Mothercare will be to execute on what is a multi-pronged strategy for global domination of the maternity, baby and early years retail markets.
However, chief executive Ben Gordon has shown great vision and purpose to date, and I think investors can have every confidence in him delivering a happy ending.
This Blog is posted by Sparkleminds, A End To End Franchise Solutions Company, Based at Bangalore, India.We offer customized services to businesses seeking expansion through the franchise route and over the last decade have helped numerous clients to scale up their businesses.You could also look at taking up international master franchises.Visit us on www.sparkleminds.com and speak to us, and we are sure you will be more than glad to understand how we could grow your existing business multi-fold times.
No comments:
Post a Comment