Berenberg starts Mothercare at 'hold', says risk/reward not compelling

Berenberg initiated coverage of Mothercare at ‘hold’ with a 250p price target.

“While we feel that Mothercare does have some potential to improve, we think the risk/reward ratio at current levels is not compelling.”

Berenberg noted that given the severe weakness in like-for-like growth and the contraction in gross margins in recent years, management is focused on rebuilding the business, aiming for more exclusivity, less discounting and greater customer engagement within stores.

The bank said it has pencilled in an average of 1.5% LFL growth for the next four years and gross margins moving up by around 75 basis points a year.

However, it said delivery here comes with a high level of risk, adding that a 1% change in LFL affects revenue by around £4m but, given the lossmaking nature of the UK business, affects EPS by around 20%.

Berenberg said the magnitude of this impact is also reflected in the very wide range of consensus estimates for the stock.

At 0945 BST, Mothercare shares were up 2.4% at 244.50p.