Mothercare plc, the global brand for parents and young children, announced full year results for the 52 week period to 28th March 2020.
Clive Whiley, Chairman of Mothercare, commented, “We have diligently managed our way through to mitigate the impact of the COVID-19 pandemic during this period of global crisis, and we emerge in better shape than we went into it. We continue to reduce costs and improve our efficiency. We are excited to launch our new UK and Ireland franchise with Boots, restoring the Mothercare brand to its home territory. We have entered into a new 20 year franchise agreement with Alshaya, our largest partner. We have successfully rolled out our innovative, working capital light arrangements with our manufacturing and franchise partners. We are now singularly focused upon building Mothercare as a global brand, both in our existing territories and beyond. We are confident with these foundations now in place Mothercare can move forward as a profitable and cash generative international franchise business, generating revenues through an asset-light model in some 40 international territories.”
Mothercare recorded a loss from continuing operations for the 52 weeks to 28th March 2020 of US$9.1 million (2019: US$26.8 million loss). Total profit for the year achieved of US$18.3 million (2019: US$123.6 million loss) included a gain on the loss of control of the group’s main trading subsidiary Mothercare UK Limited, and a shared service entity, Mothercare Business Services Limited of US$74.9 million. The comparative 53 weeks ended 30th March 2019 included a loss on the disposal of the Early Learning Centre trade and assets of US$38.8 million.
Adjusted loss for the year from continuing operations of US$8.1 million was recorded (2019: US$1.6 million loss). The comparatives for the 53 week period ended 30 March 2019 have been restated for certain prior year adjustments, and for the discontinued operations arising as a result of the loss of control of the UK operating segment, and the disposal of the ELC brand and assets in that year.
The year ended 28 March 2020 was one of significant change for the Mothercare Group. On 5th November 2019, two subsidiaries of the group, Mothercare UK Limited (MUK) and Mothercare Business Services Limited (MBS), entered administration. On the same day, Mothercare Global Brand Limited (MGB), also a subsidiary of Mothercare PLC (PLC), purchased the brand, customer relationships, and certain assets and liabilities of the international business from the administrators.
Responsibility for the UK operating segment ceased to belong to PLC from the point of administration; included within this were the UK retail store estate, through which the group sold to end consumers, as well as the group’s UK trading website. Subsequently, the administrators wound down the UK operations, generating cash to repay the creditors, with the bank debt to which MUK was a guarantor, being the sole secured creditor, and the group liable for any shortfall. The best estimate of this shortfall is US$8.9 million of the US$35.6 million applicable debt, as well as US$3.8 million of stock payments to be funded by the group.
On 19th August 2020, two significant commercial events were announced to the markets; the first being a new twenty-year franchise agreement with Alshaya Group, the group’s largest franchise partner. In addition to this, the group, which has a longstanding relationship with Boots UK Limited, will once again have a UK Mothercare-branded presence through Boots stores and their website.
International retail sales in constant currency were down 10.5% from 2019. This was in part due to a particularly challenging second half of the year due to complexities arising following the administration process, as well as trading challenges due to COVID-19. This temporarily decelerated, or in some instances constrained, the movement of product within the supply chain, which resulted in a lack of availability for franchise partners.
Retail space from continuing operations at the end of the year was 2.4 million sq. ft. from 841 stores (2019: 2.6 million sq. ft. from 1,010 stores), with the reduction in space due to the group choosing not to novate to MGB, at the time of administration, several contracts with Franchise Partners that were no longer cost effective.
India and Indonesia, two of the Group’s key markets, experienced growth year-on-year. Conversely Russia and Alshaya saw a decline, driven by the aforementioned issues with stock availability, as did China, where COVID-19 caused the store estate to close for much of the fourth quarter.
Despite China seeing the biggest in-year impact, all markets were impacted by the spread of COVID-19 by the final month of the financial year, and trading in the months post year end saw a decline as a result.
Shipments to Franchise Partners were also impacted heavily by COVID-19. The group has two distribution centres, one in the UK and one in Shenzhen, China; and whilst routes directly from suppliers to partners were able to continue, there were barriers to stock being shipped in and out of the facility in China.
In recent months the group has been in close discussion with both international franchise and manufacturing partners to modernise and improve commercial relationships to mutual benefit, with the objective of improving pricing and quality for franchise partners and reducing financial and operational risk for manufacturing partners.
Following these constructive discussions the group has successfully launched a more sustainable and less capital-intensive business model going forward, with effect from the Autumn/Winter 2020 season. This new model results in franchise partners contracting to pay for products directly to manufacturing partners, thus removing the timing mismatch being experienced with the reduction in payment terms, and so improving the group’s working capital requirements.
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The group believes this new way of working will ultimately have the added benefits of improving pricing for franchise partners, which in turn should better incentivise retail sales growth and assist manufacturing partners in reinstating credit insurance for future seasons.