After issuing what might be described as the Mothercare of all profit warnings, brokers have been rushing to downgrade their profit forecasts.
House broker Numis Securities, taking on board Mothercare’s fuzzy guidance of full-year profits of between £1mln and £5mln, has slashed its forecast for the year to the end of March 2018 to £2.5mln from £10mln.
READ: Toys go out the pram as Mothercare sounds earnings alarm
Forecasts for the year to 30 March 2019 have been chopped to £7.5mln from £13mln.
Mothercare plc (LON:MTC) indicated the end of March net debt situation would be around £50mln, which was significantly worse than Numis’s forecast of £38mln.
Picking through the bones of the statement looking for some good news, Numis noted there are welcome signs of stabilisation in the international business.
Liberum Securities observed that today’s profit warning follows hot on the heels of the alert from Debenhams.
“In our view, it highlights the continuing impact of weak footfall across overall retail destinations, the ongoing disruptive nature of online and discount players and the need for a differentiated product offering,” Liberum’s Adam Tomlinson said.
Peel Hunt said the sales update proved to be far worse than expected following November’s substantial profit warning and highlighted that before the update, full-year profits had been expected to be around £20mln or more.
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“This is very much a Mothercare-specific profit warning, exacerbated by a tighter consumer environment, but with no real read-through to the rest of the sector, in our view,” suggested the Peel Hunt retail team.
“The challenges ahead remain substantial, but we believe management’s strategy remains the right one,” the broker said, as it stuck with its ‘hold’ rating.
Its model now points to a UK loss of £17.9mln for the year, with the group as a whole weighing in with profit before tax of £0.5mln, versus previous expectations of £11.3mln.
Fiscal 2019 profit before tax is tipped by Peel Hunt to be £5.2mln.
Current-year the nadir?
The current year could at least see the nadir in terms of balance sheet pressures, but because of the operational gearing any further deterioration in trading would put the business under greater scrutiny from its lenders.
Joint house broker Shore Capital was also whistling “Always Look on the Bright Side of Life” as it highlighted Mothercare’s assertion that “cash generation and inventory positions are both strong”.
“The group’s shares have reflected and, we sense, anticipated challenges albeit we also believe that the market supports Mark Newton-Jones’ strategy to transform a business with strong heritage, credentials and capabilities for the better in the long-term. Clearly, there remains more work to be undertaken to reach sustainable cash flow and profit growth,” said Shore’s Clive Black.
Shares in Mothercare were down by 25% at 46.25p and have more than halved over the last year.