Fund managers are reportedly slashing their stakes in Mothercare, indicating a growing vote of no confidence from shareholders for the baby products and maternity retailer.
Shares in Mothercare have plunged by 71 per cent since the start of the year, thanks to a January profit warning and an update last Friday that full-year profits were likely to be even lower than the £1 million to £5 million range outlined in the January profit warning.
Last Friday’s update also saw Mothercare asking for waivers on certain financial covenants and confirmed it was working with financing partners in regards to financing needs for FY19 and beyond.
The retailer, which has been in the midst of a turnaround strategy and cost-cutting savings drive, also sought to reassure that trading had been in line with expectations since the start of the year – but conceded the market was “challenging”.
However, it’s not the first time Mothercare has entered into refinancing talks, having last done so as early as 2014. The latest woes comes just a year after it returned to profit growth.
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According to Citywire, Allianz UK Opportunities fund manager Matthew Tillet sold his remaining stake in the retailer in January.
“The original investment thesis was based on the undervaluation of the company’s capital light international franchise business, the cash flow from which could be used to help fund the turnaround of the struggling the UK business,” Tillet said in a recent update to investors.
“Unfortunately both of these drivers have become impaired.”
He added: “The international business is no longer growing and it is likely that many of Mothercare’s overseas markets will soon face similar structural issues to the UK.
“Meanwhile, the UK business turnaround has taken much longer and required more investment.
“Whilst this was expected to some extent, the problem is compounded by a weaker International business, leading to an impaired balance sheet that will, in my view, require fresh equity capital again in the not-too-distant future.
“The fund is not prepared to commit more capital to the company at this stage and with a small position the decision was taken to sell out.”
Simon Gergel, who invested in Mothercare via the Merchants investment trust, also sold out last year.
“The company had made good progress in turning around its troubled UK operation,” he said in the half-year report for the trust in last September.
“However, the international franchise operation, which had been the key profit earner, has suffered from a prolonged period of weak trading.
“Although there remains considerable value in the overseas business, the recovery there will take some time and is not without risks.”
Stock exchange filings also show UBS slashing its stake in Mothercare from just under 10 per cent of its shares to below a “notifiable threshold”, which means investors do not have to notify the stock exchange once their holding in a company falls below three per cent.
Meanwhile, Standard Life Aberdeen slashed its stake from 7.4 per cent to 4.3 per cent, while Legal & General reduced its stake from just above five per cent to below three per cent.
Last Friday, Mothercare chief executive Mark Newton-Jones said: “The retail sector continues to face a number of pressures that are clearly having a profound impact on the sector as a whole.
“Against this backdrop we are performing in line with our expectations and remain a cash generative business, but we also need to push ahead with our transformation strategy to meet our customers’ needs and continue adapting to evolving shopping habits around the world.
“We are working together with all our stakeholders, including colleagues, franchisees, financiers, suppliers and pensions trustees on this next phase of our transformation and their part in delivering these plans.
“The support already being shown gives us confidence that, despite the challenges, there remains a clear way forward for Mothercare to realise its ambition to be the leading global retailer for parents and young children.”
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