Mike Dennis Comments: Mothercare On Naughty Step After Profit Alert

January 8, 2014, Scotsman.com

Baby accessories retailer Mothercare lost almost a third of its stock market value today after warning its profits would fall short of City hopes because of weak sales during the festive season.

Analysts said the group, which recently revealed it had moved back into the black in the first half of its financial year after closing loss-making stores, had fallen victim to heavy price cutting among online and supermarket rivals.

For the 12 weeks to 4 January, total sales at the group, which has 191 Mothercare stores and 40 Early Learning Centre (ELC) outlets across the UK, tumbled by 9.9 per cent compared with the same period a year earlier.

Like-for-like sales, which strip out the effect of 11 store closures since the start of the financial year, fell by 4 per cent.

Chief executive Simon Calver, the former boss of online DVD rental outfit Lovefilm, said weaker footfall and heavy promotional activity led to lower sales and margins in the UK, while overseas trading had been hit by currency effects and “unseasonal” weather in Russia and the Middle East.

He added: “As a result of lower UK sales and the currency impact, full-year profits are likely to be below the current range of market expectations.

“We continue to focus on delivering a turnaround in the UK and exploiting the global growth opportunities.”

The warning follows a similar alert from department store chain Debenhams, which cautioned that its first-half profits would be lower than a year ago after it had been forced to slash prices in the run-up to Christmas.

In contrast, fashion chain Next delivered a bumper Christmas performance as it held off from deep discounting ahead of the big day, while Sainsbury’s today said it had enjoyed its best ever festive season.

Mike Dennis, retail analyst at Cantor Fitzgerald, said: “The UK baby clothing and equipment market remains very competitive with few retailers making any positive retail margins, especially as high street clothing chains, internet offers and supermarkets continue to grow space and share.”

Shares in Mothercare plunged 128.5p, or 30.6 per cent, to end the day at 291.5p.

Keith Bowman, equity analyst at Hargreaves Lansdown, said: “On the upside, the chief executive’s online experience continues to be utilised, with its core Mothercare online sales growing and the relatively new click-and-collect service being well received.”

However, Mike van Dulken, head of research at Accendo Markets, said management seemed to have made a “schoolboy error” by deciding not to repeat the previous year’s free home delivery offer, while a weak toy market hit sales at its ELC brand. The toy retailer was once owned by Edinburgh-based John Menzies, which departed the high street to focus on baggage handling and newspaper distribution.

Before today’s profit alert, analysts had been expecting Mothercare, which is in the middle of a turnaround plan aimed at moving its UK business out of the red, to post an annual pre-tax profit of about £16 million.

However, Matthew Taylor at Numis Securities said the broker had slashed its earnings forecast to £8m following the “disappointing” trading update.