An unscheduled trading update from Mothercare this morning (26 July) saw shares in the UK-based mother, baby and children’s goods retailer tumble 11% as it warned of slower than expected UK margin recovery and falling first quarter sales.
Covering the 15-week period to 13 July, the update, which came ahead of Mothercare’s AGM today, noted a 9.2% drop in total group sales year-on-year. UK like-for-like sales were down by 3.2%, while total domestic sales tumbled 23.2%. International retail sales in constant currencies declined by 4.5%.
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By GlobalData“The UK retail market remains challenging and though the rate of decline in LFL sales has moderated, margin investment in promotional activity has been necessary to stimulate sales, both in our stores and online,” says CEO Mark Newton-Jones.
“The impact of this has negated much of the margin benefits we had expected to materialise. Furthermore, we have observed a lower than expected transfer of sales following the CVA store closure programme which completed in early April 2019.”
Mothercare began turnaround efforts last year, with several hundred job cuts, store closures and entry into a company voluntary arrangement. Other steps have included the sale of the Early Learning Centre to the Entertainer for GBP11.5m; the sale and leaseback of its Watford head office for GBP14.5m; and setting up three new internal divisions – Mothercare Global Brand, Mothercare UK, and Business Services – to create a leaner organisational structure.
The retailer is also in the process of restructuring its UK retail operations as an independent Mothercare UK franchise.
“The process of restructuring and rebuilding a sustainable business continues, and we have in place financing plans to support these actions as we aim to be bank-debt free by the end of the year,” Newton-Jones adds.
“Our immediate priority is to complete the transformation of the business with a near-term focus on evolving and optimising the ownership, structure and model for our UK retail operations as an independent franchise.”
Looking ahead, the retailer warns the medium-term outlook for the UK market will continue to be “uncertain and volatile, accompanied by fragile consumer confidence” – and the need for continued promotional activity means gross margin improvements in the UK are expected to take longer to materialise than previously anticipated.
As a result, underlying full-year profit before tax is forecast to be broadly comparable to the prior year.
Impact of store closures
Hannah Thomson, senior retail analyst at GlobalData, notes the effect of Mothercare store closures is starting to bite.
“Mothercare hoped that its store closures would have boosted sales at its remaining stores or sales on its website, assuming that some spend would simply shift elsewhere within the business, but its results indicate that its problems are more deep-rooted and that its proposition is failing to appeal. It continues to resort to discounting, and even at this early stage in its financial year, Mothercare expects no improvement in profit before tax for FY19/20.”
She believes shoppers continue to be lured away from the baby equipment specialist by online giant Amazon, whose convenience and speed of order fulfilment is difficult to rival. “Mothercare’s online proposition certainly compares unfavourably, with standard delivery taking 3-5 working days and costing GBP3.95 for orders under GBP50.”
Meanwhile, Thomson acknowledges Mothercare is trying to capitalise on its specialist credentials by investing in sales and service training for its staff in stores – a “sensible” move, given the re-assurance and knowledge sought out by new and expectant parents.
“However, to be effective its in-store expertise needs to be communicated to shoppers, who must be convinced that Mothercare can offer something which an online pure-play such as Amazon cannot,” she adds.
