“We do not want to be a company that goes on sale every two weeks as this does not build long-term trust from customers,” says Mark Newton-Jones, chief executive of Mothercare, scoring top marks for retailing righteousness. The trouble is, progress towards the high ground, assuming it still exists in the world of kids’ car seats and prams, can come at a heavy short-term cost. Sometimes shoppers just want cheaper stuff and throw tantrums until they get it.
That, roughly speaking, was Mothercare’s experience in the Christmas period. Like-for-like sales fell by a painful 7% in the UK in the Christmas period, even though the margin-destroying clearance sale was said to be lively. The minus 7% figure wasn’t even distorted by a switch in trade from stores to the website. Sales via the two channels declined in tandem. The result is that full-year profits will arrive at a mere £1m-£5m, down from £19.7m.
Newton-Jones pleaded that he’d flagged the fact of fewer shoppers and lower spending in his November report. Yes, but the second half of the same statement had been mildly upbeat: “Notwithstanding this uncertain consumer backdrop, the Mothercare brand, whilst not immune, is in a stronger position with a much-improved product and service offer and a more robust business model.”
Well, yes, the refurbished stores have received good reviews and it’s obviously sensible to close outlets that can’t be returned to profit. But “robust” is not a word shareholders would attach to today’s Mothercare, however much the company talks about its “transformation” strategy.
The market capitalisation, after Monday’s 27.5% fall in the share price to a record low, has been transformed to a mere £77m and year-end debt will be £50m, versus net cash of £13.5m two years ago. Meanwhile, the deficit in the pension fund was £80m at the last count. Despite the relative health of the overseas franchise operation versus the UK stores, it’s not a pretty picture.
In a kinder retailing world, Mothercare’s determination to avoid discounting would find its reward eventually. The Amazon machine, unfortunately, is relentless and unemotional. Mothercare last paid its shareholders a dividend in 2012, a horrible run that (almost certainly) won’t improve in 2018.
New focus on Micro Focus
Micro Focus is the biggest tech company in the FTSE 100 these days. It occupies the unglamorous end of the market where the money is made by updating legacy infrastructure for customers that don’t need the latest kit but do want software that works reliably. It is a fix-it merchant, rather than a pioneer, and the better for it.
The corporate ambition is to produce long-term returns of 15%-20% a year for shareholders, from dividends and a rising share price, and it has delivered. You would have got 27.5% a year on average from owning Micro Focus shares from 2005.
Now comes the first serous test of that record. It is really a test of executive chairman Kevin Loosemore’s ambition in paying $9bn last year to buy Hewlett Packard’s software business, which included parts of the old UK company Autonomy. The deal was massively bigger than any Micro Focus had previously attempted – indeed, it doubled the UK’s company size – but investors were untroubled. From £20 on the day the deal was announced in September 2016, the shares surged, hitting £27 two months ago.
Now they’re back at £21.40, down 17% on Monday, as it becomes clear that execution is far from perfect. Quite how tricky is hard to judge from outside – but “bumpy”, as finance director Mike Phillips put it, is not a word investors like to hear after a big deal. It suggests customers have been lost through introspection.
Corporate confidence for the long term remains intact. Micro Focus expects to work its usual magic on profit margins and improve returns from the newly arrived business from 25%-ish to its own 45% or so. Terrific if it happens and, to be fair, the actual numbers in the half-year update weren’t far off the City’s forecasts.
But you have to wonder about the wisdom of switching the highly regarded Phillips from the finance job to become director of mergers and acquisitions. Digest the mega-meal before looking for more companies to buy.
Stalling house prices is good news
The growth in house prices in 2017 was 2.7%, says the Halifax, and expect more of the same this year – 0%-3%.
That forecast sounds reasonable since the Halifax’s numbers show that affordability remains strained by historical standards. Average house prices are about six times average household earnings, a ratio that has held for a couple of years now and seems to be as much as the UK market can bear.
The only real counter-veiling force is the shortage of homes on the market. That factor, as with earnings, is unlikely to change meaningfully this year. It’s sideways for house prices all the way to Brexit – bad news for estate agents but, actually, probably healthy for the economy.
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