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Mothercare leaves profit guidance unchanged as international sales show improved trend, UK trading challenging

UK like-for-like sales declined by 11.4% during the quarter, reflecting a combination of the difficult consumer backdrop and aggressive discounting activity undertaken in the prior year
Mothercare store
Mothercare's overall retail sales in core markets were in line with last year in constant currency terms

Mothercare PLC (LON:MTC) shares rose on Wednesday as the struggling stores group left its full-year profit guidance unchanged as improved trends in its international business helped its quarterly sales to hold steady despite continuing challenging trading conditions in the UK and a surprisingly big drop in online sales

In a trading update for the 13 week period to January 5 2019, the specialist retailer for parents and young children said overall its retail sales in core markets were in line with last year in constant currency terms.

READ: Mothercare shares slump as first-half losses widen amid survival plan

The company said its international retail sales were down 1.1% in constant currency over the period, with a 3.2% decline in actual currency.

However, UK like-for-like sales declined by 11.4% during the quarter, the group added, reflecting a combination of the difficult consumer backdrop and aggressive discounting activity undertaken in the prior year that inflated sales in that period.

It highlighted an online sales decline of 16.3% impacted by lower website footfall, lower iPad sales in store due to the store closure programme and a smaller Toy offer with less discounting.

Mark Newton-Jones, Mothercare’s chief executive officer commented: “Looking ahead, our International business continues to show signs of recovery, although we expect market conditions in the UK to remain challenging with further disruption until April from our store closure programme.

“However, given the pace of our strategic transformation plan, our full-year profit guidance is unchanged."

On course for strategic transformation

The CEO added: “Whilst the UK continues to be challenging, in part as a result of our planned restructuring, we are still on course to deliver the necessary transformation.”

He added: “Crucially, the Group continues to be disciplined in its management of cash and is progressively reducing its net bank debt.

“We recently completed the sale and leaseback of our UK head office and have created a leaner organisational structure. Together with other improvements, this has allowed us to reduce the levels of debt in the business, supporting our aspiration to be bank debt free by the end of 2019.”

The Mothercare boss also said its UK store closure programme is ahead of schedule, with 36 stores currently transitioning for closure, meaning the group will have a total UK estate of 79 stores by the end of March 2019.

In late morning trading, Mothercare shares were 2.7% higher at 15.94p.

Finely balanced

In a note to clients, analysts at Shore Capital commented: “From a risk-reward perspective, therefore, we believe Mothercare's equity is finely balanced; failure to deliver better trading will eventually eat into the resources and time gained from the changes undertaken to date.

“However, broad-based sustainable revenue growth on a structurally lower cost base offers the enticing and potentially exciting prospect of positive operational gearing and strong free cash generation.”

They concluded: “This fine balance leads us to adopt a ‘hold’ stance on the Group's equity. We will probably be forced to re-visit this stance one way or another over the next 12-months."

 -- Adds share price, analyst comment --

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