Mothercare calls in administrators as losses mount
Baby and maternity retailer Mothercare is putting its loss-making UK operation into administration following a failed restructuring attempt, as experts question the strategy of its corporate recovery.
The global operation can no longer afford to prop up Mothercare UK and Mothercare Business Services Limited (MBS), which provides additional. services to the British business.
While Mothercare’s global group generated £28.3m profit last year, its UK retail operations lost £36.3m. The parent company carried out a review of the UK business found that it is “not capable of returning to a level of structural profitability”.
Mothercare UK went through a company voluntary arrangement (CVA) last year after drafting in KPMG to oversee the shuttering of 55 shops as part of the turnaround proposal, dropping its operations from 134 outlets to 79.
A CVA enables firms to settle some of the amount that it owes to creditors while agreeing another arrangement to cover the remainder. The recovery plan was completed ahead of schedule in reducing 134 shops to 79, the company said, but the businesses losses widened.
“This decision shows that for retailers in financial distress, CVAs don’t always equal a happy-ever-after, and they are no substitute for a radical rethink of the UK high street,” said Freddy Khalastchi, business recovery partner at accountancy firm, Menzies LLP.
“Despite government figures suggesting that only about one in three CVAs are successful, this is yet another high-profile example of the process failing to turn a retailer’s financial fortunes around,” said Khalastchi.
Rick Smith, managing director of insolvency service Forbes Burton, said Mothercare’s decision to sell off Early Learning Centre to rival firm The Entertainer for £13.5m in July may have accelerated the slump.
“Had chief executive Mark Newton-Jones been able to revitalise the Early Learning Centre business, it could have slowed Mothercare’s decline,” Smith said.
Smith said this decision narrowed Mothercare’s appeal in a competitive market. “Parents crave convenience,” said Smith. “Mothercare simply didn’t provide the same amount of convenience as its competitors.”
He added that the retailer failed to evolve whilst shedding its stores. “Where competitors offer more choice in stores that have lower overheads, Mothercare has struggled to shrug off the burdens of high business rents and rates,” said Smith.
A further CVA can’t be ruled out, Khalastchi said, as one of the options available in an administration. Mothercare UK said it was again working with KPMG on a contingency plan that could also mean the sale of the business.
Khalastchi said it was clear Mothercare’s initial attempts at cost reduction didn’t go far enough.
“Otherwise, it may be that revenue from its remaining stores was insufficient to support its head office and other overheads,” Khalastchi said. “While more struggling retailers are clutching onto CVAs as a means of restoring profitability, it’s important to recognise that they work where stores already have a viable business model, otherwise they are only a temporary sticking plaster solution.”
Exploring experiential retail methods, reacting to changing consumer habits and a strategic rethink will be required to weather the storm facing the sector, said Khalastchi.
High street bloodbath
According to KPMG, 44 retail businesses entered administration between April to September, including some of Britain’s most well-known names.
In recent months, high street clothing retailers Bonmarche, Jack Wills and Karen Millen have all gone bust. Thomas Cook, Debenhams, Oddbins have also failed in the wider retail sector this year, as major high street brands struggle to survive the downturn.
“Mothercare’s administration this week is simply an indication of the broad cultural shift towards ecommerce which has afflicted our high streets across the nation,” said Simon Renshaw, senior insolvency practitioner at AABRS.com
“What was once an essential British brand has failed to keep up with the needs of a younger demographic who shop primarily online, either for reasons of convenience and price on Amazon, or via brands with which they have a direct emotional resonance.”
Mothercare UK filed a notice of intent on Monday to appoint administrators for the UK business later. The business employs about 2,500 employees, all of whom now risk losing their jobs.
“Since May 2018, we have undertaken a root and branch review of the group and Mothercare UK within it, including a number of discussions over the summer with potential partners regarding our UK retail business,” said Mothercare’s global group in a statement.
“Through this process, it has become clear that the UK retail operations of the group, which today includes 79 stores, are not capable of returning to a level of structural profitability and returns that are sustainable for the group as it currently stands and/or attractive enough for a third party partner to operate on an arm's length basis. Furthermore, the company is unable to continue to satisfy the ongoing cash needs of Mothercare UK.”
Mothercare’s publicly-quoted parent firm is in talks with lenders over a refinancing deal to secure its future trading.