With an abrupt leadership change, a profit warning and CVA rumours, fears are growing for Mothercare as it becomes the latest British retailer suffering financial distress in early 2018.
Last week chief executive Mark Newton-Jones was ousted as CEO, after four years at the helm, and replaced with immediate effect by Kmart Holding Group’s president David Wood.
Wood has a reputation for turning around troubled chains, and Mothercare chairman Alan Parker said the business needed “the most effective leadership in place”.
This week rumours of possible company voluntary arrangement (CVA) were also circulating in the property industry, as Mothercare seeks to cut costs.
In January Mothercare issued a profit warning and adjusted group profit for the year was expected to be between £1m and £5m, down from previous expectations of £11m. The retailer is due to report its fourth-quarter results on Thursday.
Commenting on the CVA rumours, Jonathan De Mello, head of retail consultancy at property agency Harper Dennis Hobbs, said: “Mothercare is in many ways an institution in UK retail, but the business has been in trouble for some time. It has too many stores and could potentially trim its portfolio by up to 50% with little margin impact on the business. Clearly, a CVA – which is almost certain – would be one way of doing this.”
Another property source said: “Mothercare is really challenged. It’s not a viable business in its current state. The problems are fundamental – it’s not just about too many stores in high-rent locations. It needs more customers in stores and it needs to increase its conversion rates.
“[While a CVA is said to be on the cards] a more radical solution is required. A pre-pack administration is a better long-term solution, with someone buying an element of the business.”
Last month Mothercare called in professional services firm KPMG to advise on the renegotiation of its financial covenants.
A spokesman for Mothercare said discussions with its lenders on the terms of its existing financial facilities were “progressing constructively” and it expects discussions to conclude before its preliminary results in May. He added: “We are also exploring additional sources of financing to support and maintain the momentum of our transformation programme, and we are engaged in preliminary discussions on securing such additional financing.”
One Mothercare supplier told Drapers he feared for the retailer’s future: “Mothercare is a large part of our business, so I’m extremely worried about it, but I don’t think it will go under. Given the high proportion of its sales that come from online [around 42%] I wouldn’t be surprised if someone buys it for the customer data alone.”
Sofie Willmott, senior retail analyst at GlobalData, said that for suitors such as Sainsbury’s – which, last week, would not deny rumours it had considered a takeover of Mothercare – brand synergy may be what is attractive.
“Mothercare has a good presence in key shopping centres, which is appealing for Sainsbury’s [which does not]. Both brands have a reputation for quality, and their products appeal to mid-market shoppers and families. You can see how they can complement each other.”
Another industry source agreed: “Mothercare is ripe to be bought. I imagine lots of people are circling it and I am aware of at least two firms that have looked at it.”
However, he added that Mothercare’s debt may be the biggest problem for prospective buyers: “It is a great name but it’s saddled with lots of debt. If you look at the company, its position, its name and history, you would say, ‘It’s a good firm with a good legacy. It has legs,’ but then you have to consider the debt and the leases.”
One industry source expressed surprise that Newton-Jones had been forced out of his role, stating he may have been “scapegoated” by the Mothercare board for the retailer’s failings: “If the turnaround plan is the right one, then whoever is at the helm should be able to lead it. Mothercare’s problems are structural. No matter how hard you try to drive online, you still have a huge problem with UK leases and stores. The UK business has been weak for several years.”
Victoria Nightingale, director at Barracuda Search, agreed: “The UK business needs to be fixed. Mothercare needs to overtake John Lewis and ensure that every expectant parent goes into store or online and spends due to excellent service. That has been its downfall.”