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Mothercare warns on profits as efforts to 'protect brand' hurt sales
Retailer Mothercare has warned that profits are likely to be less than half the level expected as management held off from discounting as long as possible despite challenging UK and international trading.
UK like-for-like sales fell 7.2% in the 12 weeks to 30 December, meaning means LFL sales for the year to date are down 0.9% after growing an encouraging 2.5% in the first half.. Even online sales were down 6.9% during the period.
The parent-and-child retailer, which is closing stores as part of an effort to improve its estate, saw total group sales fall 2.4% in the Christmas period and also the year to date.
With no improvement anticipated for UK market conditions in the short-term, adjusted group profit for the year are seen as likely to be in the range of £1-5m, versus around £10m expected and after the group reported a £0.7m loss in November's half-year results.
"In our UK business, we took a conscious decision to remain at full price to protect our brand positioning prior to Christmas but to then discount more heavily in the end of season sale," said chief executive Mark Newton-Jones.
"We have subsequently seen good progress with strong sell through rates on Autumn Winter clearance lines albeit these carry lower margins and will lead to a further reduction in full year margin as a result."
Cash generation and inventory positions both remained strong, though Newton-Jones said the central cost base would be reduced, which will benefit next year's financial year. Net debt is expected to be £50m at year-end.
While international trade was challenging in the quarter overall, down 6.8% in actual currencies, there was a return to moderate growth in the Middle East over the last seven weeks of the quarter.
"Whilst this is positive news, it is too early to say whether or not this is the beginning of a more sustained up-turn in sales across the region," Newton-Jones said. "In Russia, our largest international country by turnover, we also saw a return to growth as the weather became colder, leading to improved trading."
Shares in Mothercare tumbled 26% to 45.86p in early trade on Monday.
The decline in UK sales was particularly disappointing given the recent progress on that front, said analyst Neil Wilson at ETX Capital, after the improvement in LFL sales and gross margin in the first half.
"We should look to management's decision not to discount in the peak trading season as a significant contributing factor.
"Admirable perhaps but with competitors slashing prices ahead of Christmas amid (justified) fears of a slowdown in consumer spending, it looks as if the 'conscious decision' to remain at full price prior to Christmas but to then discount more heavily in the end of season sale was a mistake.
"Clearly Mothercare et al are up against it and the update does not bode especially well for the retail sector ahead of an important week of releases."