Broker snap: UBS downgrades Mothercare to sell

29th Nov 2011 09:47

UBS has downgraded its rating on children's and parenting products retailer Mothercare from neutral to sell and slashed its target price by over three quarter after assessing the group's first half results published two weeks ago.The broker notes that Mothercare reported a first half underlying pre-tax loss of £4.4m which excludes £55m of goodwill and other write-offs and £20m of UK property restructuring. Last year, the group made an underlying pre-tax profit of £12m. Furthermore, like-for-like (LFL) sales and gross margins also declined, while an increase in net debt resulted in a substantial dividend cut."Management is reviewing the size and scope of the UK business, announcing its conclusions in early 2012. We expect the market to remain competitive and only cost savings will prevent the UK loss from increasing," UBS said. While the broker believes that ongoing international store growth will continue, international LFL sales are expected to "deteriorate".UBS cuts its full-year pre-tax profit forecast from £27.5m to just £2.5m due to the weak first half results "and assuming that subdued trading conditions persevere in the UK".The price target comes down from 420p to 100p. Despite the downgrade, shares were trading 1.02% higher at 159.2p by 09:34.BC