Mothercare struggles continue, talks of UK ops moving to franchise model
It looks like there could be big change ahead at struggling retailer Mothercare. The company's recovery isn’t happening as fast as it had expected and it seems that its UK business is moving to a franchise model.
Late on Thursday, a report had said that the company was poised to sell its UK business following last year’s company voluntary arrangement (CVA) and the business securing fresh support from its lenders.
Then on Friday, it issued a trading update that didn't actually spell out its plans in detail, but did more-than-hint at them.
At the very end of the update, CEO Mark Newton-Jones said: “The process of restructuring and rebuilding a sustainable business continues. 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.”
So what has led the company to this point? Well clearly, it hasn’t had an easy time of it lately and the expectations of improved trading seem to have been dashed.
The company said that for the 15 weeks to July 13, it has revised its expectations and “the medium-term outlook for the UK market will continue to be uncertain and volatile, accompanied by fragile consumer confidence.”
Against this backdrop “and the need for continued promotional activity, gross margin improvements in the UK are expected to take longer to materialise than previously anticipated,” it added. Full-year pre-tax profit is expected to be similar to last year, which means it should remain loss-making.
Total sales for the company, including those by franchise partners abroad, have fallen 9.2% in the latest quarter.
In the UK, its sales have fallen 23.2%, as a result of the store closure programme. And while the decline in like-for-like sales has slowed, they were still down 3.2% as promotional markdowns grew, although it saw a stronger performance towards the end of the quarter.
Unfortunately, the online sales in which it has placed a lot of hope haven't taken up the slack. The company has been making many of its online sales through orders taken in its shops via iPads. Shop closures have shut off that avenue of boosting sales in many areas and its e-commerce operation was down 12.1% in the period. The company now has only 79 physical shops in the UK, down from 134 year ago.
Newton-Jones said 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.” This has meant “much of the margin benefits we had expected to materialise” haven’t happened. “Furthermore, we have observed a lower than expected transfer of sales following the CVA store closure programme which completed in early April 2019,” he added.
Its sales have also continued to drop abroad, with international retail sales down 4.5% on a currency-neutral basis and down 2.1% on a reported basis, despite an almost 6% increase in selling space. Growth in the key markets of India (+5.5%), Indonesia (+10.5%) and Russia (+3.4%) has been offset by a retail sales decline in the Middle East of 11.1% (in constant currency).
Despite all this, Newton-Jones insisted that “we have continued to make good strategic progress in the first quarter in our transformation to deliver a sustainable and profitable future for the Mothercare brand.”
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