Mothercare cuts margins to slow UK sales slide

published 12 January 2012

Remedial action by management to stop the slump at baby and toddler products seller Mothercare appears to be paying off.

Total group sales were up 2% and worldwide network sales were up 4.5% in the 13 weeks to January 7th.

International retail sales were up 15.5% for the same period, while worldwide network sales were up 3% in the third quarter.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

However, it wasn't all good news, with like-for-like sales over the past year down 5.4%, total UK sales down 5.3% and third quarter total group sales down 1.2%.

UK Direct in Home sales were also down 3.4% in the year-to-date and 2.2% during the third quarter.

Alan Parker, Executive Chairman said: "Worldwide network sales increased by 3.0%, as a result of continuing strong growth in our profitable and cash-generative International business. We have opened our 1,000th store outside the UK and also launched in four new countries - Chile, Colombia, Iraq and Morocco.

"In the UK, the better like-for-like sales performance was achieved in an increasingly competitive consumer environment. Additional promotional activity was successful in driving a 5% like-for-like sales increase in December and managing overall UK inventory levels, which are currently 17% lower than last year. The management actions we have already taken, which include a new web platform to launch next financial year, are expected to improve Direct and overall performance in 2012."

Singer Capital Markets said sales were better than expected, with the 3% decline in UK like-for-like (LFL) sales not as bad as expected, though it notes this partly reflects stock clearing, especially of clothing lines.

The stock clearance has come at the expense of margins, Singer notes, with full-year margins likely to be down by four-and-a-half to five percentage points; previously the company had guided to a four point cut.

"The net effect though is that they are on track to meet FY [full-year] forecasts. After several misses through 2012 this comes as a relief," Singer's retail analysts note.

The broker had previously cut its fiscal 2011/12 forecasts to a loss before tax of £6.3m, when the consensus view among those covering the stock is for Mothercare to break even. Singer is contemplating going back to its earlier, less pessimistic, forecasts.

In contrast, Panmure Gordon is above the consensus forecast, and is halving its estimate for fiscal 2011/12 ("FY2012E" in broker jargon) profit before tax to £1.1m.

Its discounted cash flow based price target is cut from 145p to 88p.

The broker was also dismissive of the new web platform the chairman was bragging about, wondering whether is is "too little, too late"?

Like Panmure Gordon, Peel Hunt rates the shares a "sell", and it is downgrading its full-year profit before tax forecast from £3m to break-even.

"The risk to future forecasts will centre on any move to more competitive pricing, which is likely to [hve an] impact [on] future year margins keeping

profitability some way off," Peel Hunt's John Stevenson said.

Despite the broker gloom, the share price rose 2.13% to 168p by 13:47.