Mothercare plc (LON:MTC) shareholders threw their toys out of the pram on Monday morning after a grim trading update from the retailer.
The firm which sells mothers and toddlers’ products expects adjusted group profit for the year to 31 March 2018, to be in the range of £1mln to £5mln; according to data aggregator Factset, the consensus forecast for profit before tax prior to today’s profits warning was £11.9mln.
READ: The brokers give their verdict
The retailer said its UK retail estate saw like-for-like (LFL) sales in the 12 weeks to December 30 fall 7.2% from the same period of 2016.
Online sales, which now represent around 42% of total UK sales, fell 6.9%.
Mothercare said UK sales fell off a cliff as a result of lower footfall – fewer customers passing through Mothercare’s doors – and lower customer spend.
The retailer said it experienced lower gross margins as a result of heavier discounting, but at least this got shot of some slow-moving stock and boosted cash generation.
Christmas conundrum
The group held its prices in the run-up to Christmas but then discounted more heavily in the end of season sale.
If things are bad in Mothercare’s home market then they are not much better overseas.
International retail sales were down 6.8% year-on-year, partly due to the weakness of sterling; in constant currency terms sales were down 3.0%, despite online sales growth of 8.5% in constant currency and 7.4% in actual currency.
"As we signalled in November, there has been a softening in the UK market with lower footfall and website traffic resulting in lower spend in both stores and online. This trend has continued, resulting in our UK LFL of (7.2)% in the 12 weeks to 30th December,” said Mark Newton-Jones, the chief executive officer of Mothercare.
“International trade was challenging in the quarter overall, but we have seen a return to moderate growth in the Middle East over the last seven weeks. Whilst this is positive news, it is too early to say whether or not this is the beginning of a more sustained upturn in sales across the region. In Russia, our largest international country by turnover, we also saw a return to growth as the weather became colder, leading to improved trading,” he added.
Net debt at the end of the current financial year is expected to be roughly £50mln, which Newton-Jones said would leave the group with sufficient liquidity and covenant headroom within its existing banking facilities.
READ: Mothercare posts quarterly sales decline on a weak international performance
Newton-Jones did not hold out much hope of any improvement in the short-term market conditions in the UK, and neither did independent retail analyst Nick Bubb.
“Another day, another profit warning…and this time it’s in the not totally unexpected form of Mothercare, which has brought forward its scheduled announcement from Thursday, to flag that y/e March profits may be as little as £1m-£5m because of tough UK trading conditions,” Bubb said.
Bubb said “a valiant attempt to trade full price before Christmas ended in heavy discounting in the sale”.
“Despite stringent controls over capital expenditure, net debt at year-end is expected to be c£50m, and shareholders may be comforted to hear that “at this level, we have sufficient liquidity and covenant headroom within our existing facilities”.
Mothercare shares were the biggest fallers on the London stock market in early deals, losing around a quarter of their value, leaving the company valued at just £77mln.