Mothers Work (MWRK) is a specialty retailer of mid-priced and upscale career, casual, and specialty maternity clothing. The company has 1,591 stores, which are primarily located in upscale regional malls across the country. These stores operate under the Mothers Work, Motherhood Maternity, A Pea in the Pod, and Mimi Maternity names. It also leases maternity departments in larger retail stores ands channels through catalogs and the internet. Mothers Work uses its custom TrendTrack merchandise analysis and planning system to "give the customer what she wants, when she wants it." The $169M company (market cap) has 2,600 employees, who contributed to $561M in sales in FY05.
We believe Mothers Work (4.3M float) could be a compelling, but highly speculative short squeeze play.
1) Career women need career clothes -- even when they are pregnant. Mothers Work offers mid-priced to high-end career, casual, and special occasion maternity apparel through its four chains. About 90% of its merchandise is designed by the company and manufactured by third-party contractors. As far as we can tell, Mothers Work is the only pure play on the high growth apparel-for-expecting-mothers niche.
2) We find MWRK too leveraged for our liking. MWRK's debt/share of $24 and $3M in cash on the balance sheet -- combined with a lumpy top line story over the last 36 months -- strengthens the bear case on the stock. Although MWRK's debt/equity is 1.67 and its leverage ratio (assets/equity) in excess of 4 x, we find this risk moderately offset by the firm's whopping 62 x receivables turnover flow, which translates into $14 per share in working capital. MWRK currently spits gross margins in excess of 62%, which attests to the firm's ability to mute COGS.
3) MWRK grew its top line about 10% over the last 52 weeks (in line with industry) but saw its earnings jump 66% (2.5 x industry mean) over the same time period. The stock is trading at 2 x growth on a PEG basis, or 146 x current EPS. We find the stock more than fairly valued at current levels and would go as far as to say that the market is too optimistic about MWRK's future. Are we the only ones looking at the balance sheet? We think given MWRK's unappealing capital structure and stomach-churning interest coverage ratio (EBIT/annual debt expenses) of 1.1 x, the stock should trade for no more than 1.3 to 1.5 x growth. We award it a small premium solely because MWRK holds sustainable brand visibility in a small market category, with competition from the likes of Walmart (NYSE:WMT), Gap (NYSE:GPS), and Target (NYSE:TGT) notwithstanding.
4) Really dismal ROE, ROIC (return on invested capital, or NOPAT/total invested capital), and net margins (less than 1%, or 600 bps lower than the industry median) are some of the reasons shorts have piled on top of the stock (5% of float). We believe a short squeeze could play out as more and more investors look for obscure names (MWRK is followed by just 2 analysts) in the retail space. Demographical data indicates that stay-at-home moms are a thing of the past; as more expecting women keep the 9 to 5, demand for the right clothing should remain robust, which bodes well for companies like Mothers Work. Should our scenario materialize, shares could feel some buying pressure, which would in turn force shorts to cover their positions, effectively driving the stock price even higher. Although we rate the stock a SELL based on fundamentals alone, we're smart enough to know that small caps like MWRK can shoot the lights out, murder the bear crowd, and trade at higher multiples precisely when everyone else is proclaiming "this dog won't hunt."
MWRK 1-yr chart: