Mothercare half-year results show why UK business had to close
today Dec 10, 2019
Embattled maternity retailer Mothercare sent shockwaves through the retail sector when it announced in November it was closing all UK stores and online platform in a bid to save the brand from extinction.
This Tuesday, its half-year report lays bare the scale and severity of the struggles faced by its UK retail business, a venture that failed to deliver annual operating profit in over ten years.
In the 28 weeks to 12 October, UK sales fell by almost 20% to £131.8 million, and reflecting the challenges for both stores and online trading, sales dropped by 2% on a like-for-like basis.
But why did the UK business fail to achieve economic viability? In addition to facing the same headwinds working against most retailers, Mothercare said it struggled to deliver a stable gross margin as 70% of the UK’s shop floorspace was given to partner brands in the baby category. The margin and the contribution from these brands reduced over time, and when Mothercare started introducing more higher margin Mothercare-branded product, it realised its shops were too large to fill with its own product alone.
In the face of severe competition, the company tried to provide a higher level of exclusivity, but it said despite its efforts, most of its third party products could be bought elsewhere at cheaper prices.
The store estate was reduced to 80 locations last year as part of a series of company voluntary agreement (CVA), but not enough trade transferred to the remaining stores or move online. Meanwhile, cash constraints throughout 2018 hampered the firm’s ability to launch an effective marketing campaign to restore its tarnished image.
"This has been an extraordinarily challenging period in Mothercare's 58-year history... It was simply not financially viable to maintain the UK store estate and supporting infrastructure any longer without putting the whole Mothercare Group at risk,” said CEO Mark Newton-Jones on Tuesday.
The Mothercare brand and the majority of its international franchise agreements have been moved to a new legal entity, Mothercare Global Brand Limited, in a move that completes the group’s transformation into a “capital light, cash generative and profitable business”.
But the nursery firm’s half-year results also paint a challenging landscape for the parts of the business that will continue trading. With the group focusing solely on its global international franchise, international markets will take on a new importance. However, iInternational retail sales were down 5.3% in constant currency in the 28 weeks to 12 October, and fell by 1.6% in actual currency.
Mothercare admitted that while India, Russia and Indonesia delivered growth, it experienced some difficult trading conditions in the Middle East and China. International retail sales fell from £321.4m to £316.4m during the period, and by 5.7% on a like-for-like basis.
The muted performance of its international business, coupled with the struggling UK division, meant a widening of pre-tax group loss to £21.2m from £18.5m a year earlier. Adjusted pre-tax international profit dropped to £12.2m from £15.5m, and net debt expanded to £24.5m.
But not everything was negative in the report. Sales from online operations grew by 10% in constant currency with the biggest growth coming from the Middle East at 120% and India at 38%. And Mothercare is focusing on building its brand by working more closely with its franchise partners and designing its product with the global consumer in mind.
Next year, a new diffusion offer will be rolled out with its Indian franchise partner across 30 stores in tier 2 and tier 3 cities in India, with the potential to take the collection of 400 products to up to 500 stores across India.
The US, Japan, Australia or Brazil have also been identified for potential opportunities and the UK could see Mothercare return in the form of a franchise.
“We are confident in the future of the Mothercare brand,” said Mark Newton-Jones. “We believe that, without the financial and management burden of running a UK retail operation, we can singularly focus Mothercare on its global international franchise.
“This opportunity for this business is best demonstrated by the fact that there are 130 million babies born every year across the world, compared to 700,000 in the UK, and the group will now look to drive value for shareholders by harnessing that potential.”
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