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(ShareCast News) - Peel Hunt upgraded its rating on Mothercare to 'buy' from 'hold' and set a target price of 275p that offers more than 45% upside to the shares' last close.
The broker acknowledged the irony of Mothercare's UK business crawling back on track to return to profitability next year, coinciding with international progress tottering, mainly due to currency headwinds.
Mothercare's UK stores are now producing positive like-for-like sales for the first time since 2008 and the online, customer-centric approach puts the business well ahead of quoted peers in mindset and execution, Peel Hunt said.
As a result it has upgraded its UK assumptions for the UK to be back in profit next year, with the store refurbishment programme in full swing, delivering double-digit sales uplifts for "little disruption" and converting roughly 30% of the estate each year over the next three years.
The improved insight on customers, in an attempt to reach the highly granular level of pure-play e-retailers, has impressed the broker.
"Store-based retailers generally lack the customer-centric mindset, let alone the systems and capabilities to run the business that way," analyst John Stevenson observed. "Mothercare is now well into this journey, driving high average transaction values in-store and online, with greater response to customer communications (sales +81% from email campaigns), all driven by a central customer database and increasing levels of personalisation."
Looking overseas, where only 2% of sales are transacted online, changes to systems are underway that Stevenson believes will generate a "significant" uplift in revenues and improve customer recruitment.
However, the softer international outlook and especially adverse currency movements outweighs the improved UK outlook, leading to cuts to forecasts for profit before tax by circa £3m to £19.2m for 2016, and £2m to £30.4m for 2017.
Nevertheless, trading on 14 times forecast earnings of 13.4p, "the shares offer value", the broker said, particularly given the UK transformation and opportunity for online improvement in the international business.
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