More UK store closures as banks back Mothercare's rebirth

Sales in the UK estate of baby and toddler products seller Mothercare remain on the crest of a slump, prompting the company to announce the closure of 111 stores in the UK.

Mothercare plans to reshape its UK operations around a profitable core of 200 stores, comprising 95 out of town stores and 105 High Street stores. Of these, 173 stores will carry the Mothercare brand and 27 are Early Learning Centres.

Fourth quarter (January to March) trading figures demonstrate why this radical action is needed in the UK, although this was no profit warning, with the group saying underlying profit before tax for the full year is expected to be in line with expectations.

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Fourth quarter salesIn the 12 weeks to March 31st, worldwide network sales were up 4.5%, which represents an improvement on the third quarter's year-on-year rise of 3.0%.

Total group sales were down 4.2%, however, representing a sharp deterioration from the third quarter fall of 1.2%. The car boot sale "everything must go" approach at the UK stores in early 2011 appears to be entirely responsible for the deterioration, with UK sales down 9.5% year-on-year (yoy) in the fourth quarter, compared to a 3.0% yoy decline in the previous quarter.

International sales remain a bright spot for the group, rising 18.0% yoy in the fourth quarter after advancing 15.0% in the previous quarter.

During the year a net 134 stores were opened outside the UK; 27 in the Middle East, 20 in Europe, 76 in Asia-Pacific and 11 in Latin America. Mothercare now has 1,028 stores in 58 countries outside the UK. Over the 52-week period international retail sales were up 16.0% on the previous year. Figures for the previous year have been adjusted for comparison purposes to factor in the fact that the previous year was a 53-week year.

UK like-for-like (LFL) sales fell 8.2% yoy in the fiscal fourth quarter, having been down just 3.0% in the preceding three month period. Direct in Home sales were down 3.2%, a worse performance than the third quarter, when sales in the direct channel were down 2.2%.

The group said the fall-off in the UK was expected, because the year before it had gone overboard with price cuts in the January sales in order to clear stock. Inventory levels remain tightly controlled and UK stocks are 13.0% lower than last year, the group revealed. The disciplined approach to stock levels has resulted in an improved UK gross margin performance in the final quarter of the financial year.

Full year pictureLooking at the picture over the full year, worldwide network sales were up 4.3% and total group sales were up 0.7% on the (adjusted) corresponding period the year before.

Total UK sales were down 6.3%, with LFL sales down 6.2%, while Direct in Home sales were down 3.4%.

Management has estimated the cost of revitalising the UK store portfolio over the next three years at around £35m. Consequently, it has negotiated the refinancing of its banking facilities with HSBC and Barclays, increasing the level of committed facilities from £80m to £90m and extending the term to May 31st, 2015. These facilities further strengthen the group's financial position and provide additional liquidity and covenant headroom to accommodate the new three year strategy, the group revealed.

"Today we have announced the framework of our decisive three year strategy to restore the UK business back to profit and strengthen our foundations for growth. This will see us operate a lean, more competitive business, focused on the existing profitable stores in a smaller UK portfolio, combined with a state of the art online platform. Our International business continues to perform strongly and we plan to further accelerate growth," said Executive Chairman, Alan Parker.

"Mothercare is a great global brand with strong international partners. Today marks the beginning of a three-year turnaround and I am confident we will deliver a sustained recovery and long term success," Parker said.

JH