Mothercare (MTC) has called in administrators for its struggling UK business, in the latest sign of the pressure that high street retailers are under.
The company’s share price plunged nearly 28% to 8p after the announcement, having been around 25p earlier in the summer. In 2010 the shares were worth just under 200p.
Parent company Mothercare Plc said it “is unable to continue to satisfy the ongoing cash needs of Mothercare UK", adding that the UK arm is not able to return to profitability.
The group has had the UK retail division under review since 2018, when a new chief executive was appointed, in a bid to turn its fortunes around.
AJ Bell’s investment director, Russ Mould, says Mothercare was too slow to react to the threat from online competition such as Amazon. A growing UK population should have provided an opportunity for the retailer, which also appears to have missed. Mould also notes that Mothercare tends to score poorly for customer service in an era when online reviews are crucial for a company’s reputation.
The UK business, which lost £36 million in the year to the end of March 2019, reflects the struggles of the high street amid pinched consumer spending and changing shopping habits. But Mothercare is not alone in its struggles. Research by The Share Centre shows that this has been the worst set of quarterly results for UK companies in many years. “The UK economy may have avoided a technical recession over the last few months, but listed company earnings have not,” says Helal Miah, investment research analyst at The Share Centre.
Most sectors saw profits decline in the third quarter of 2019, although banks, IT companies and travel firms bucked the trend.
Latest results from retailer Next (NXT) highlight the growing divide between online sales and bricks-and-mortar retail, with the firm’s high street sales down 6.3% in the quarter while online sales rose 9.3%.
Administration vs Insolvency
Mothercare’s stock is one of the most shorted in the FTSE, according to the FCA’s daily list of short positions, with Menta Capital and SVM Asset Management among the firms hoping to take advantage of falls in Mothercare’s share price.
Investors often hold short positions in businesses whose prospects they believe look bleak, but while it often easy to identify struggling retailers, there can e a shortage of stock to borrow when a company is in dire straits. Thomas Cook’s demise had been well trailed but some fund managers stuck with the stock to the bitter end.
What’s different about Mothercare’s situation? Companies often call in administrators as a way of buying time to repay debts and avoiding the liquidation process, which Thomas Cook eventually succumbed to. While the administration process often leads to liquidation and a sell-off of assets, it’s still possible for a company in administration to produce a viable recovery plan that satisfies creditors. Thomas Cook became insolvent after a last-ditch rescue attempt failed to convince creditors.
Carpetright (CPR) is an example of a company that survived the administration process. In 2018 it entered a "Company Voluntary Arrangement" and made a deal with creditors that involved shutting stories.
In terms of active funds, Mothercare makes up 1.86 of Sanditon Investment Trust (SIT) and just under 1% of Majedie UK Smaller Companies.
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