Analysis: Beleaguered Mothercare turns to CVA

Mothercare has become the latest example of a retailer that failed to adapt to a rapidly changing omnichannel landscape, set against a backdrop of deepening competition.

“The business has not moved far or fast enough to keep up with the ever changing dynamics and shopping patterns of our customers,” concedes Clive Whiley, the interim executive chairman. “The continued decline of UK high street footfall and our inflexible and deep store cost base, alongside the ever growing importance of multi-channel retailing, presented significant and worsening challenges to our business model with our current number of stores in the UK.”

He made the admission as Mothercare announced a company voluntary agreement (CVA), following the likes of New LookCarpetright and Toys R Us UK down this route. This will involve the closure of 50 stores, more than one-third of its 137-strong UK portfolio, triggering hundreds of job cuts. There will also be rent reduction discussions with landlords and a comprehensive debt and equity refinancing (further details on which can be found here).

The announcement came as little surprise to anyone. Bryan Roberts, global insights director, TCC Global, observes that, in terms of clothing, there are no shortage of alternatives in the shape of the supermarkets, high street fashion chains and online, and the same is true of toys. “Looking at the hardware part of the mix, the supermarkets and department stores have heavily encroached on this space, as has have online specialists and second-hand marketplaces,” he says. 

“It’s worth noting that Mamas & Papas and Kiddicare have also had their fair share of problems in recent years, so there’s clearly a bit of pressure out there, but Mothercare has arguably lost a bit of its resonance with expectant or new parents and anecdotal evidence suggests that it lacks a bit of credibility in terms of service and expertise.”

Picking up the pace

Whiley insists that in the last few years the company’s strategy has been broadly right: “Defining our place as a leading global brand and retailer for parents and young children, but our execution has been too slow and expensive and we need to move faster, be more efficient and improve our focus on cash generation and returns.”

He adds: “To remain sustainable we will need to improve our customer offer and product range, the in-store execution of our remaining estate and our online proposition. In our base plans we are assuming that we will see a vast reduction in the majority of the sales from the stores that we are closing, although we will continue to focus on our online offering in order to re-capture a proportion of these sales.”

According to Fiona Cincotta, senior market analyst, City Index, whilst Mothercare’s plans don’t make for pleasant reading, the decision to close dozens of stores does at least hit one of its biggest problems on the head.“Like many other struggling retailers, Mothercare expanded too quickly during the good times. Unshackling itself from loss-making stores could offer management more room to invest in a customer offering that has been neglected for so many years,” she says.

Last but definitely not least is the surprise return of Mark Newton-Jones to the helm. He was sacked last month after a big fall in sales over the Christmas trading period and a profits warning. That decision was made under the watch of chairman Alan Parker, who has since stepped down.

“One can only assume that the board felt his intimate knowledge of the company's pains made him the right person for the job after all. His biggest challenge will be keeping costs under control, while somehow managing to reinvigorate the brand to make it more competitive,” says Cincotta.

She concludes: “It looks like existing investors will have to wait until July to find out the issue price of the equity raising and to what extent their existing holdings will be diluted. For new investors considering a punt on a rebirth, today's news holds some promise. But a brighter future is by no means assured for what will still be a troubled and undernourished business.”