Can Mothercare plc rise 30% after today's update?

Laura Ashley store

Shares in Mothercare(LSE: MTC) jumped by as much as 5% in early deals this morning after the company published what can only be described as its most positive trading update for the past year.

The update will come as a relief to many shareholders, who have suffered over the past year as the value of Mothercare's shares have been cut in half thanks to weak trading and a loss of confidence. 

But now it looks as if management has finally drawn a line under the company's troubles. Over the 13-week period to January 7, UK like-for-like sales grew 1%, and overall UK sales rose 0.6%. Online sales for the period increased 5.5% and now represent 40% of UK sales. International retail sales fell 6% in constant currency and grew 13% in actual currency, reflecting ongoing tailwinds from weak sterling. Overall for the 13 weeks to 7 January, total group sales grew 1.8% year-on-year and are up 0.2% year-to-date. During the period the company opened 40 new stores, closed 28 and reduced its UK footprint by 4.5%.

Starting the turnaround 

Overall group sales growth of 1.8% year-on-year during the third quarter may not be the most impressive figure, but it's a welcome turnaround from the first-half performance. For the first half of Mothercare's financial year, the company reported a 0.6% contraction in total group sales year-on-year and a 15.7% drop in underlying group profit before tax.

While investors will have to wait for the full-year figures before they're able to assess whether or not Mothercare's recovery is truly under way, today's update has gone a long way towards reassuring the market that the group is heading in the right direction. 

And hopefully, the improved trading figures will help restore investor confidence in the firm. Thanks to a lack of investor confidence, shares in Mothercare have lost 57.4% of their value over the past 12 months and are currently trading at a discount to the wider apparel sector. 

Specifically, at the time of writing shares in Mothercare are trading at an EV to EBITDA ratio of 7 and a forward P/E ratio of 12.1 compared to the apparel sector average of 8.7 and 18.6. If Mothercare's turnaround has legs, there's no reason why the shares can't command a sector average P/E, which would take them to around 175p based on current City forecasts. However, it might be difficult for the market to give the company such a valuation so more a conservative estimate of 150p per share, or 30% above current levels might be more appropriate.

A yield play?

The one drawback of Mothercare is that the shares don't offer a dividend of any kind. If you're looking for a retail turnaround that also offers an attractive dividend yield Laura Ashley(LSE: ALY) might be a more appealing opportunity. 

At present shares in Laura Ashley trade at a forward P/E of 10.8 and City analysts expect the group to pay 2p per share in dividends per year for the next two years. If the company hits this target, investors are set to receive a dividend yield of 10.3% per annum, which works out as a return of 20.6% from dividends alone between now and the end of the group's 2018 financial year. 

Small-cap bargain? 

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Our analysts believe that this company's potential upside could be as great as 50%.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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