Broker tips: Mothercare, Dr Martens

The broker said the current financial year is expected to be "another year of transition for the company" as it refinances to improve financial flexibility, improve profitability and appoint a new CEO (the search for a new boss has been reset, with interim management taking the helm for now).

The retailer reported on Friday that adjusted EBITDA fell 44% to £6.7m in the year to 25 March, just ahead of the market's £6.6m estimate.

Worldwide retail sales by franchise partners fell 16% to £323m, but for continuing markets (which excludes the Russian operations which were suspended last year) revenues actually rose by 9%.

"Perhaps the most significant positive was the considerable reduction in the pension scheme deficit, which stood at £35million, down from £78 million in March 2022 and a substantial £124.6 million in March 2020," said Shore Capital analysts.

"As the company navigates a leadership transition, it has also initiated refinancing discussions to better cope with rising interest rates. Looking ahead, Mothercare aims to complete the refinancing process soon and projects its franchise operations to exceed £10 million in operating profit.

"Therefore, we maintain our 'hold' rating for FY24F as the company seeks to diversify its brand further and penetrate new markets."

Equity research firm Edison reckons that Dr Martens' recent share-price underperformance could reverse if the iconic footwear retailer has a successful turnaround of operational issues in North America.

Following a recent "teach-in" day with the company last week, Edison hailed Dr Martens' ongoing product innovation, as well as its brand awareness and relevance among younger demographics through its collaborations with influencers and marketing campaigns on social media.

"DOCS’ consumer base is very diverse as well as loyal, with the brand consistently above peers for sentiment scores among UK consumers, which continues to be a driver for the group’s global growth prospects," said Russell Pointon, director of the consumer division at Edison.

The company also presented its sustainability strategy as it looks to target natural materials from regenerative agriculture by 2040 and removing fossil-fuel chemicals by 2035.

The shares are currently trading around the 140-150p level, not far off the record low of 113p reached in the summer after full-year results revealed that its North American performance was holding back group sales growth.

The company admitted at the time that it had made "operational mistakes" in the US, such as the move of a distribution centre and the execution of marketing campaigns and online trading. Management called the strategic review and turnaround of the regional business its "number one operational priority".

"DOCS currently trades on discounts of 48% and 32% for EV/EBITDA and P/E, respectively, in FY24 to global luxury, global footwear and sportswear brands. A weak share price performance since IPO in early 2021 due to a combination of operational issues and wider market effects means its valuation, naturally, looks low relative to its historical trading multiples," Pointon said.

He said that this valuation discount to the wider sector could "narrow" based on the performance in North America.