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Stand back! Here are the WORST performing UK stocks over the last decade

Paul Summers — Sun, 19 Jan 2020 11:59:27 +0000

Yesterday, I took a closer look at the three best performing UK stocks over the last decade, according to a recent report from financial data firm Refinitiv. Today, I’m focusing on the opposite end of the spectrum.

Here are the three stocks that gave the most pain to their holders over the last 10 years.

Wealth killer

Considering the sea change in the fortunes of many high street retailers over the last decade, it is not surprising that two of them make the cut.

In bronze medal position is baby goods seller Mothercare (LSE: MTC). According to Refinitiv, shares in the battered firm lost almost 96% of their value over the last decade, with a compound annual growth rate of -27.23%.

Mothercare’s demise is a cautionary tale on the importance of moving with the times, at least as far as UK trading is concerned. While factors such as rising wages and expensive rents clearly played a role, it was the company’s inability to offer shoppers something distinct in terms of quality, price, or convenience that proved to be the final nail in its coffin.

With no sign that the onslaught from online-only operators is going to slow anytime soon, I think we can be fairly sure that Mothercare won’t be the last once-mighty name to fold.

Money pit

The fact that a commodity-focused firm makes the list is another non-surprise. Weak prices led the Basic Materials sector to perform particularly poorly over the last decade with an annualised growth rate of just 3.1%.

Occupying second spot on our list of stinkers is Russian gold miner Petropavlovsk (LSE: POG). Its shares fell a little more than 96% over the period, with a compound annual growth rate of -27.68%.

That’s not to say that the company is done for. Despite its valuation tumbling over the years, Petropavlovsk remains a sizeable business with a market capitalisation of a little over £400m. What’s more, holders enjoyed a steller 2019 with shares almost doubling in value.

With the gold price continuing to rise on concerns over the health of the global economy, it’s possible to imagine this stock could still make money for those brave (or reckless) enough to buy it. Just don’t expect a comfortable ride.

And the winner is….

Mothercare and Petropavlovsk have been awful stocks to own since 2010. There is, however, one UK-listed firm that’s fared even worse.

Top spot among the worst shares over the last decade goes to floor covering supplier Carpetright (LSE: CPR). The value of the company fell 99% over the last decade with a compound annual growth rate of almost -40%.

Like Mothercare, the firm’s value was destroyed by a challenging consumer market and crippling finances. It agreed to be purchased for a paltry £15.2m by its largest shareholder (Meditor) last November. At the time, the Purfleet-based business owed around £56m and said that it needed £80m if it was to return to growth.

The fact that the stock traded around the 800p mark in 2010 and sold for just 5p per share a decade later shows just how brutal a game investing can sometimes be. It also provides Fools with a reminder of the importance of exiting a losing position as early as possible if the investment case changes.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 FTSE 250 growth stocks I’d buy and hold for the next five years

Paul Summers — Thu, 28 Jun 2018 14:15:04 +0000

When you consider that it includes stock market dogs such as Debenhams and Mothercare — both having struggled to compete with online competitors — a lot of current investor hatred for the retail sector feels justified. Factor in fragile consumer confidence and you can see why so many businesses with a high street presence are worried about surviving, let alone thriving.

Nonetheless, I think there are a number of diamonds in the rough for investors willing to adopt the Foolish maxim of buying quality stocks for the long term and doing little else. Here are two examples.

Overseas expansion

Today’s pre-AGM update from JD Sports Fashion (LSE: JD) will no doubt please those who had the courage to invest in the company during the fairly frequent dips in its share price over recent months. In addition to reminding the market of JD’s record results for the previous financial year, executive chairman Peter Cowgill stated that management confidence in its prospects over 2018/19 had not altered since April. This was then followed by encouraging news on the £4.2bn-cap’s progress overseas.

In accordance with its target of opening an average of one site per week, 18 new stores have been unveiled across Europe over the period to 23 June. Another 16 stores have been added in the Asia Pacific region (including the company’s first forays into South Korea and Singapore), although 75% of these were conversions from fascias operated by partners. The recent purchase of US-based retail chain Finish Line is another example of just how much potential JD has in international markets.

In addition to the above, it’s also worth highlighting that the company’s finances remain robust with a net cash position of £130m at the end of the previous financial year. Most retailers would kill for this, hence why I continue to regard JD as an excellent hold for growth-focused investors.

That said, the 30% rise in value since the beginning of April means the shares aren’t the bargain they once were and are unlikely to gallop ahead between now and when interim numbers are delivered in September.

For those with a more value-focused approach, I suggest taking a closer look at another FTSE 250 constituent.

Super cheap

I continue to be blown away by the market’s dislike for Superdry (LSE: SDRY) given that its ‘problems’ appear nowhere near as pronounced as other retailers. The stock has now fallen no less than 45% from the all-time highs reached in January, leaving it on a valuation of just 10 times forecast earnings for 2018/19. That looks screamingly cheap to me.

Sure, May’s pre-close trading statement could have been better. A decline in full-year gross margins, partly the result of cutting prices in an attempt to lower inventory levels, wasn’t going to please the market. Nor was the cut in revenue guidance for the next 12 months as a result of “ongoing challenging conditions in stores“.

Relative to peers, however, Superdry appears in good shape. Cash flow looks healthy, dividends look safe, management is continuing to invest for the future and the company is debt free.

The business confirms full-year figures on July 5. While a further drop can’t be ruled out, I’d be surprised if it was significant, simply because the market’s treatment has already felt unnecessarily harsh. As such, my finger remains poised over the ‘buy‘ button.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Superdry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This small-cap stock might be a falling knife worth catching after HALVING in price

Paul Summers — Tue, 19 Jun 2018 12:20:20 +0000

With many high street retailers continuing to struggle thanks to reduced footfall and the onslaught of more nimble competitors, it’s become something of a rarity for a day of trading to pass without at least one of the former issuing a profit warning and making a gloomy prediction on the outlook for trading.

That said, today’s 50% fall in the share price of recently listed lifestyle retailer Footasylum (LSE: FOOT) will surely come as a surprise to even the most bearish market participants, particularly given the initially solid-looking numbers in today’s full-year results.

Sales up

Revenue at the small-cap jumped 33% to £195m over the financial year to 24 February with the company reporting “strong growth across all channels and product categories”. Interestingly, 30% of the latter came from online where sales soared 41%, no doubt helped by investment in the company’s main website alongside launches of sites and apps for Footasylum’s own brands Kings Will Dream and SEVEN.

All told, adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) rose 12% to £12.5m, although margins were lower due to money being ploughed back into the company. Last year saw the creation of a new in-house studio in Manchester alongside the opening of a second warehouse facility in Rochdale and 10 new stores. Staff costs also increased following the 21% jump in headcount over the reporting period to 2,270 employees.

A profitable company posting decent numbers with a growing online presence. What’s not to like?

So, why are the shares crashing?

A lot of today’s share price capitulation appears to be down to Footasylum’s outlook for next year.

In addition to remarking that recent trading had not been immune to the general malaise experienced on the high street, CEO Clare Nesbitt stated that the Rochdale-based firm’s desire to open new stores in order to capitalise on its peak trading period in H2 will lead to higher costs that will restrict earnings growth. Indeed, pre-tax profit is now expected to be roughly 25% lower than that previously expected.

Is the market reaction overdone? I’m inclined to answer in the affirmative.

While I agree with broker Liberum that a reduction in profit guidance is “clearly disappointing” — even more so given that the company only came to the market last November — it surely doesn’t warrant a near halving of the company’s value in a single session. Relative to other retailers such as, say, Mothercare or Debenhams (the latter issued yet another profit warning this morning), Footasylum’s problems appear fairly minor. The company is clearly doing a lot of good things online and it’s not as if its image is staid or tired. Nor is the company ridiculously indebted. Indeed, a cash balance of £11.4m at the end of the last financial year means its balance sheet is in far better shape compared to peers.

Whether the stock will continue to fall or bounce back quickly is, of course, hard to say. Moreover, attempting to predict and capitalise on short-term market movements is counter to the Foolish philosophy of buying quality companies for the long term.

Nevertheless, like retail peer Superdry, Footasylum has now earned a place on my watchlist. A frothy looking valuation of 30 times forecast earnings before today was — in retrospect — clearly too high but today’s (over)reaction could see the shares become something of a bargain once the dust has settled.

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Here’s why Mothercare’s share price is flying today

Paul Summers — Thu, 17 May 2018 11:27:59 +0000

Shares in mother and baby products retailer Mothercare (LSE: MTC) soared almost 30% in early trading this morning as the battered micro-cap announced a comprehensive rescue plan to the market.

In crisis

Finding itself in a “perilous financial condition” as a result of increased competition and poorly performing stores, Mothercare revealed that it would refinance the business and restructure its UK portfolio through company voluntary arrangements (CVA) — agreements with creditors that allow a business to repay its debts over a fixed period of time.

The company has proposed to raise £28m in July through the issue of new shares. Revised debt facilities of 67.5m (with a final maturity date of December 2020) were also disclosed along with £18m worth of loans from the company’s largest shareholders and a trade partner. The latter will allow Mothercare to meet its short-term liquidity requirements.

All told, this should provide the company with up to £113.5m of funding as it attempts to turn things around.

On top of this, Mothercare will accelerate the reduction of its store estate to reduce losses and save on rent. A total of 50 stores will go, leaving a portfolio of 78 by 2020. There will also be “material rent reductions” at 21 other stores.

With Interim Executive Chairman, Clive Whiley, stating that the potential for the brand “remains significant”, is it time to reconsider investing in Mothercare? Not unless you have the patience (and optimism) of a saint.

Today’s huge rise needs to be put in context. In a little under three years, stock in the Watford-based business has collapsed in price from 300p to 21p (before today) as its market share has been pretty much eradicated by online competitors, low-price retailers (e.g Primark) and supermarkets. How the company can possibly stage a meaningful recovery when its UK operation hasn’t delivered a profit in six years is beyond me.

Those inspired by legendary value investor Benjamin Graham’s penchant for finding “cigarette butt” stocks will be drawn to Mothercare, but I think most investors should steer clear. A price-to-earnings (P/E) ratio of 9 for the current financial year looks enticing but — with no compensation for taking on so much capital risk — the suggestion that it remains anything but a value trap remains fanciful.

Today’s news may be enough to postpone its permanent inclusion in the growing list of high street casualties, but I’m still of the opinion that the death knell for Mothercare will eventually sound.

A safer bet

Despite its undeniably punchy valuation, lifestyle clothing brand Joules (LSE: JOUL) feels like a far safer alternative.

January’s interim results revealed an 18.2% rise in revenue and 22.5% increase in underlying earnings before interest, tax, depreciation and amortisation (EBITDA). With the company now starting to make serious strides overseas, it’s no wonder management anticipates full-year profit being “slightly ahead” of analyst expectations.

As mentioned, there’s just one problem. Since arriving on AIM two years ago, Joules’s stock has climbed almost 75% in value, leaving the company trading at 28 times earnings for the soon-to-be-over 2017/18 financial year. That said, a PEG ratio of 1.55 suggests growth hunters would still be getting a reasonable deal. In complete contrast to Mothercare, Joules also has net cash on its balance sheet.

While I wouldn’t rush to buy the shares right now, the retailer is certainly one to consider should markets correct once again.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Joules Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Can the Mothercare share price make a successful comeback?

Roland Head — Sat, 14 Apr 2018 08:30:25 +0000

When I last wrote about troubled retailer Mothercare (LSE: MTC) in December, I suggested that things might be about to get much worse. Unfortunately they have.

The group’s shares have fallen by nearly 75% since my last article, as further updates have revealed continued poor trading.

During the 12 weeks to 30 December, UK like-for-like sales fell by 7.2%, while UK online sales fell 6.9%. International sales were 3% lower during the period, excluding currency effects.

The good news is that the firm’s sales performance did improve slightly during the final quarter of the firm’s financial year, which runs to late March. UK like-for-like sales only fell by 2.8% during this period, while UK online sales returned to growth, rising by 2.1%.

However, international sales continued to worsen, falling by 3.7% during the final quarter. Full-year sales for the whole group are expected to be 1.9% lower than last year.

More shareholder cash required?

Despite raising £100m from shareholders in 2014, Mothercare’s net debt was expected to be about £50m at the end of March. As of 12 April, the company remained in discussion with lenders about refinancing.

One reason for this delay may be that lenders are waiting for the firm’s new chief executive, David Wood, to produce a fresh turnaround plan. Recent press reports suggest that this might include a company voluntary arrangement (CVA) to allow the firm to close about 47 of its 143 stores.

If this happens, I’d also expect the lenders to require an equity fundraising to improve the group’s cash position. Mr Wood may have been referring to this in comments on 12 April, when he said that Mothercare was continuing “to explore additional sources of funding”.

A glimmer of hope?

Looking ahead, broker forecasts suggest that adjusted earnings could recover to 2.4p per share in 2018/19. This gives the stock a 2018/19 forecast P/E of about 7.5.

This might seem cheap, but if new shares are issued as part of a restructuring, existing shareholders could face significant dilution. I think it makes sense to wait until the company has completed any refinancing before considering whether to invest.

This is how it could work

Mothercare isn’t the only well-known retailer with financial problems. Flooring specialist Carpetright (LSE: CPR) has seen its share price fall by more than 70% since it reported a “sharp deterioration in UK trade” with a “significant impact on profitability” in January.

However, Carpetright appears to be several steps closer to a solution than Mothercare. On Thursday, the company announced details of a CVA proposal that would allow it to close 92 sites, and agree a rent reduction on a further 113 sites.

If the firm’s landlords approve this plan, then management also plans to raise £60m through an equity placing and open offer. This cash will be used to help reduce debt and fund the group’s turnaround plans.

I’m not rushing in

Without its lossmaking stores, Carpetright’s profitability could improve significantly. This could become an attractive recovery play.

The problem for small investors like us is that if the plan is approved, most of the new shares will be issued to institutional buyers. They may well be sold at a big discount to the current share price. If this happens, the existing shares could fall sharply.

On balance I think it’s probably still too soon to buy, but I’ll be watching this situation with interest.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Will the Mothercare share price ever make a successful comeback?

Rupert Hargreaves — Fri, 13 Apr 2018 10:40:04 +0000

Over the past 12 months, the Mothercare (LSE: MTC) share price has fallen 85% as the retailer’s turnaround has hit a wall.

Shareholders and senior management alike have been pinning their hopes on the turnaround strategy set out by CEO Mark Newton-Jones, who came to the business four years ago from online retailer Shop Direct with an impeccable record.

However, after a disastrous Christmas trading period, exacerbated by Newton-Jones’s strategic decisions at a time when the rest of the retail industry slashed prices to attract shoppers, the CEO was replaced with immediate effect at the beginning of April.

David Wood, a former Tesco executive, has now stepped into the breach. Wood has also recently been working as president at the US department store giant Kmart, so it certainly seems as if he has the right credentials.

Unfortunately, the challenge he has inherited might prove to be too much even for this retail veteran.

On the edge of a cliff

Mothercare is currently locked in talks with its lenders over a new finance package to keep it afloat. According to a trading update published by the company yesterday, these talks have been “constructive“, and the group is looking at alternative sources of funding as well. Floor space was reduced by 11% for the 12 weeks to March 24, and Woods is reportedly planning to eliminate another third of outlets that are underperforming. Sales fell 5.6% in the UK and 11% overseas for the period. These figures illustrate the challenge facing new management.

Nevertheless, in my opinion, it’s not time to give up on Mothercare just yet. The company does have some strengths, its brands are recognisable throughout the UK, and the online business registered a turnaround sales growth of 2.1% for the 12-week period.

That said, threats to the group’s existence are numerous. Cheaper competition online, falling discretionary incomes and rising costs across the firm’s store portfolio mean that Mothercare is operating in a very hostile environment. There’s also the company’s debt to consider. Management has been guiding for debt of £50m for 2018, which according to my calculations, will give a debt-to-equity ratio of around 100%.

Buy, sell or hold?

So, Mothercare does have some strengths, but the company is being hobbled by its sizeable physical store presence and weak balance sheet.

With this being the case, it’s no surprise the company is considering a CVA to shut down 47 of its 143 stores (according to news reports) and change rent terms on the others. This may be the best outcome for the group. Exiting unprofitable stores and reducing the rent roll will allow it to focus on the development of the online business, one of the firm’s principal strengths.

However, if management does choose to go down the CVA route, it’s unclear how investors and the Mothercare share price will fair. For the time being then, until we have more clarity on Mothercare’s outlook, it looks to me as if the shares are uninvestable, although my Foolish colleague Peter Stephens seems to disagree.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

85%-faller Mothercare isn’t the only turnaround stock I would buy today

Peter Stephens — Wed, 11 Apr 2018 13:05:48 +0000

In the last year, Mothercare’s (LSE: MTC) share price has fallen by over 85%. The business has experienced an incredibly challenging period which has caused it to release profit warnings and disappointing financial figures. In the short term, further pressure on its valuation cannot be ruled out.

However in the long run, the retailer could now offer turnaround potential. It appears to have a wide margin of safety, with investors seemingly having priced in further disappointment for the mother and baby goods business. As such, it could be worth a closer look alongside another company which is expected to deliver improving levels of profitability over the medium term.

Uncertain outlook

The key Christmas period was a relatively disappointing one for Mothercare. It was unable to deliver the performance which it and the market was expecting. A lack of discounting for most of the period seems to have been a key reason for its sub-standard performance, while discounting late in the season meant that gross margin was relatively weak.

This comes after a period where the company appeared to be putting in place an improved strategy. Now, though, its future prospects appear to be highly uncertain. This could mean that there are more challenges ahead for the business – especially since the outlook for UK consumers is downbeat due in part to inflation being above wage growth.

Improving outlook

Despite the problems it faces, Mothercare is expected to report a rise in its bottom line in the 2019 financial year. Its earnings are due to increase by 30%, and then by a further 81% in the 2020 financial year. Clearly, there is scope for these figures to change and the company may miss its guidance due to difficult trading conditions. However, the figures also serve to show that the company may be able to deliver a turnaround faster than the market is currently expecting.

With the stock having a price-to-earnings growth (PEG) ratio of 0.1, it seems to offer growth potential at a reasonable price. While at the riskier end of the investment spectrum and currently experiencing financial uncertainty, it could be worth a closer look for less risk averse investors.

Future potential

Also offering turnaround potential is oil and gas production company Gulf Keystone Petroleum (LSE: GKP). It released results for the 2017 financial year on Wednesday which showed a profit for the first time since its entry into Kurdistan. Its net profit of $14.1m shows that it’s moving in the right direction, with significant operational progress having been made in recent years.

In 2017, the company met its gross production target, delivering average production of 35,298 barrels of oil per day (bopd). It also remains confident of meeting its near-term target of 55,000 bopd as it invests more heavily into its Shaikan project.

Looking ahead, Gulf Keystone Petroleum is expected to report a rise in earnings of 194% in the current year, followed by additional growth of 82% next year. Since it trades on a PEG ratio of 0.1, it appears to offer a worthwhile risk/reward ratio for the long run.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why I’m avoiding Mothercare plc after today’s 25% slump

Rupert Hargreaves — Mon, 08 Jan 2018 11:23:07 +0000

Shares in mother and baby goods retailer Mothercare (LSE: MTC) are crumbling this morning after the company warned once again on profits.

Like many of its peers in the retail sector, Mothercare stumbled over the Christmas period as it struggled to win over shoppers. The group said its same-store UK sales fell 7.2% in the 12 weeks to December 30 compared with last year and online sales also slumped by 6.9% for the period.

Following this dire trading, the company is expected to produce a result significantly below previous expectations for the year. Mothercare said adjusted pre-tax profits would be in the range of £1m to £5m in the year to May. This compares with a figure of £19.7m in 2017 and is more than 50% below the previous analyst estimate of £12m for the year ending 31 March 2018.

Multiple headwinds

According to CEO Mark Newton-Jones, the company suffered from its decision to hold off on price reductions until the end of sale season. Higher prices pushed consumers away but since the discounting started the firm has “seen good progress with strong sell through rates on Autumn Winter clearance lines.” However, these sales “carry lower margins and will lead to a further reduction in full-year margin as a result.“

Going forward, management is not “anticipating any improvement in the short-term market conditions for the UK,” and as a result, it seems as if Mothercare’s outlook is going to be unclear for some time yet.

Turnaround has hit a wall

Mothercare’s poor Christmas is somewhat of a surprise. Even though the whole retail industry is suffering from similar pressures, at the beginning of 2017 it looked as if the company’s efforts to rebuild itself for the modern retail world was paying off. As I covered last year, for the 52-week period to 25 March 2017, group sales expanded 6.2% year-on-year and digital efforts were starting to pay off.

Nine months on and it looks as if the firm is going backwards. What’s surprising is that the company’s online sales are now sliding. Changing consumer shopping habits have resulted in most retailers reporting a fall in in-store sales over Christmas, although in most cases, higher online sales have helped offset the decline. For example, last week high street bellwether Next reported a 6.1% decline in store full price sales for the 54 days to 24 December, but online sales for the period jumped 13.6%, helping the group report positive overall sales growth for the period.

With sales falling across the board at Mothercare, it looks to me as if consumers have completely turned against the company’s offering. Management’s decision to stop discounting in the most important sales period of the year seems to have been a big error, and now the firm is having to dump its stock at knock-down prices.

In today’s highly competitive retail environment, Mothercare can’t afford to be making these mistakes. That’s why I’m not catching this falling knife today; it looks as if the group’s turnaround has hit the rocks.

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Rupert Hargreaves owns shares in Next. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

3 stocks that could be crushed by Christmas

G A Chester — Sun, 10 Dec 2017 09:40:55 +0000

Game Digital (LSE: GMD) has a pretty poor record of trading in the important Christmas period. After a bad Christmas 2011, its predecessor company went into administration a couple of months later.

The business was salvaged by private equity and refloated at 200p a share in the summer of 2014. The shares climbed to 348p before collapsing 30% when a bad Christmas that year produced a profit warning in January. Christmas 2015 was even worse, with a profit warning coming the day before Christmas Eve, sending the shares crashing 38% to 128p. Finally, trading last festive season wasn’t particularly good but by then shares had declined to sub-60p.

Game made a loss for its financial year ended July 2017 and analysts are forecasting another loss for the current financial year, despite the arrival of the Xbox One X console in November and a stronger slate of new titles than last year. The shares are still trading at sub-60p and the balance sheet boasts net cash, but this is a stock I’m continuing to avoid.

Toddling nowhere fast

At 70p, shares of Mothercare (LSE: MTC) are at around the same level today as at the dawn of the century. They’ve traded a good deal higher at times during the intervening period, but the company keeps heading back to square one as it tries to find a strategy for sustainable growth in a changing retail market.

Its shares tumbled over 18% last month when it reported it had swung to a loss in the 28 weeks to 7 October. It advised that international markets were challenging during the period and continue to be so. Furthermore, towards the end of the reporting period, and in subsequent weeks, it’s seen a softening in the UK market with lower footfall and spend.

More positively, management said: “We are on track with our transformation plans … We continue to invest and make progress, developing the Mothercare brand into a digitally led, global specialist.” Is the company on the cusp of a new era of sustainable growth and shareholder returns? I can only say I’ll believe it when I see it. As trading currently stands, and with net debt also having more than doubled over the last 12 months, Mothercare is firmly on my list of stocks to avoid.

Christmas trading could be telling

Like the baby and parenting specialist, department stores group Debenhams (LSE: DEB) is also struggling to adapt to changing shopping habits. In its results for its financial year ended 2 September, the company reported a 17% decline in underlying profit before tax to £95m, while the statutory number was 44% down at £59m.

The company said: “We have made good progress in setting the foundations for our new strategy, Debenhams Redesigned.” The costs of this (£36m) were responsible for the large fall in statutory profit and the company has said there will be further transformation costs (£20m) in the current financial year. It said it also expects net debt to rise to between £280m and £300m from the last reported £276m.

I’m a long way from being convinced by Debenhams’ transformation strategy and Christmas trading could be telling. I’m avoiding the stock, as it continues to look dangerously overvalued to me.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 famous growth stocks that may not be around much longer

Roland Head — Sat, 09 Dec 2017 09:50:29 +0000

Sometimes you have to cut your losses and sell. And for shareholders in the two companies I’m looking at today, I think that time could be close.

Platinum miner Lonmin (LSE: LMI) has been forced to raise fresh cash from shareholders three times in the last eight years. While most big miners have returned to profitability over the last two years, Lonmin has not been able to do this.

Why are things so bad?

In August, it announced an operational review to try and address the problems caused by the “adverse macroeconomic conditions” and “inflationary cost pressures” facing platinum miners in South Africa.

It plans big cuts to future spending and hopes to be able to sell or share some of its assets to improve cash generation.

But the harsh reality is that not all South African platinum miners are losing money. Rival Anglo American Platinum managed an operating profit of around $50m on sales of $2bn during the first half of 2016. Lonmin generated an operating loss of $181m on revenue of $486m during the period.

A particular problem is that many of the group’s mine shafts are old, deep and expensive to operate.

Likely to be a value trap

We don’t yet know much about last year’s trading, as the firm’s full-year results — which were scheduled for 13 November — have been delayed. That’s worrying in itself, as was the firm’s decision to secure a pre-emptive waiver on some of its banking covenants earlier this year.

I think investors should be cautious until we know more. With the stock trading at an 80% discount to its book value of around 325p, the market is pricing-in further problems.

Lonmin may make it back to profitability, but I think it could end up being broken up and sold piecemeal, with very little value returned to shareholders.

The next big retailer to fall?

When Mothercare (LSE: MTC) published its half-year results on 23 November, the retailer’s share price fell by nearly 20% in one day. The shares are now worth 43% less than they were six months ago.

Unfortunately, this turnaround story appears to be faltering. Mothercare’s underlying operating margin fell from 2.2% to just 0.3% during the six months to 7 October. As a result, the group slipped to an adjusted pre-tax loss of £0.7m for the half year, compared to a profit of £5.9m for the same period last year.

Restructuring costs and other one-off costs are also draining cash from the firm. Net debt has risen from £15.6m to £37.6m over the last year.

The group says that there has been a “softening in the UK market” in recent weeks, while “weak trading in the Middle East” is dragging down its overseas business. Analysts have cut their forecasts and now expect the group to report a profit of just £13m for the current year.

That puts the stock on a forecast P/E of 13, with profits expected to rise next year.

My concern is that in the UK at least, many of Mothercare’s type of products are either sold cheaply by supermarkets or face intense price competition online. This firm used to fill a clear niche in the market. I don’t see this anymore. I think there’s a real risk this retailer could end up going under.

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