• Mothercare has recently been through a successful financial restructuring led by turnaround expert Clive Whiley.
  • Analysts believe there is value in Mothercare's brand, its capital-light international model and turnaround potential for the UK.
Mothercare has made significant progress in enhancing its digital capabilities

Mothercare has made significant progress in enhancing its digital capabilities

Mothercare needs to focus on further investment in digital and development of international online sales if it is to convince shoppers it is the leading global specialist for parents and young children, analysts say.

The ailing UK retailer has recently been through a successful financial restructuring led by turnaround expert Clive Whiley. A gross GBP117m (US$152m) of funds has been raised, giving the business the breathing space to engineer a necessary improvement to its trading platform, especially in the UK.

In July, Mothercare announced plans to close 50 stores and bring back former CEO Mark Newton-Jones under a new strategy aimed at securing the financial footing of the company. The firm has been in something of a tailspin, both financially and operationally since mid-2017, and through two company voluntary arrangements will now take the UK business from 137 outlets to no more than 77 by June 2019.

With Newton-Jones back in the fold and Whiley now on-board, Shore Capital analysts believe the future for Mothercare is looking relatively positive.

"We believe Mr Whiley has saved Mothercare, plain and simple. He has given the group the basis to stabilise, self-improve and trade the UK and see through a better operating and development programme overseas. The group has reasonable headroom and liquidity, to our minds, through the refinancing, to see through its programme of self-improvement," they say.

One of the key challenges for the company, the analysts believe, is to first stabilise and then recapture its UK gross margin, which over the last decade has fallen from the high 40s to around 38% at the end of fiscal 2018. In order to achieve this, Mothercare will focus on improved buying terms from better product sourcing, pricing for value with quality, repositioning the brand back to full price, leveraging specialism, and marketing of quality, style and design together with good value for money.

The new management team believes its strategy over the last few years has been broadly correct, and following the refinancing the company will now accelerate its transformation plan, which involves becoming a digitally led business, supported by a modern retail estate, running a lean organisation while investing for the future, and expanding further internationally.

"In our view, Mothercare has made significant progress in enhancing its digital capabilities in recent years through the development of an improved online proposition and tablet-enabled in-store ordering," the analysts say.

Online sales now account for 43% of UK retail sales, compared with 18% back in 2014, and the company has 2.7m active customers on the UK database. Mothercare is targeting that the online proportion of sales can grow towards 60% over the medium term, but the analysts believe this will require further investment in the digital offering, infrastructure and supporting IT systems.

"There are further opportunities to improve the online performance, both in the UK and internationally, in our view. There remains work to do across the digital proposition, particularly in improving the customer online experience from checkout to product delivery. There are also plans to upgrade the look and feel of the website and optimise the accessibility of the product content, including improving the speed of the site."

A big opportunity also remains in extracting greater value from the customer database with improved personalisation, they say, and in further developing international online sales.

Currently, around 80% of Mothercare's international revenues are derived from five countries: the Middle East; Russia, India; China; and Indonesia.

"This suggests to us a fairly long tail of other countries with small contributions to international group turnover," the analysts say. "In our view, it would be sensible to focus on these key markets to maximise the opportunity and consolidate its position where it sees significant growth opportunities whilst closing out franchises in underperforming markets, so reducing costs."

Taking into account the UK non-food store market in 2018, Mothercare's trading guidance associated with the refinancing, and concerns about brand degradation through the recent work streams, Shore Capital is forecasting like-for-like sales of minus 12% for fiscal 2019, and further gross margin erosion of around 370 basis points.

Yet against favourable multi-year comparatives and in-store and online work streams progressively coming through, the analysts forecast a move back into the black in fiscal 2020, albeit a modest profit of GBP1.2m.

"We believe there is value in Mothercare's brand, its capital-light international model and turnaround potential for the UK, albeit the business still has much to do to convince shoppers that it is the 'leading global specialist for parents and young children'.

"Much has been done and achieved by Mr Whiley; much remains to be done by broader executive teams for this brand's potential to be fully realised to shareholders' benefit. In the meantime, we highlight that we see strong intrinsic value in Mothercare, noting the international division alone could be valued at in excess of GBP120m based on what we consider to be a prudent FY2019F profit forecast, [and] the existing capital structure."