Pre-close Trading and Business Update

Mothercare plc

Pre-close Trading and Business Update

Mothercare plc ("Mothercare" or "the Company"), the global specialist brand for parents and young children, today issues a pre-close trading update for the financial year ended 27 March 2021.

Highlights

• Unaudited net worldwide sales of £326 million for the year impacted by varied approaches to Covid-19 in franchisee markets

• Significantly reduced net debt of £12.1 million at the year end

• Performance over the recent period is in line with expectations and the Group anticipates reporting a small EBITDA profit for the financial year, against previous guidance of a small loss

• New asset light operating model providing ongoing financial benefits

• Further overhead reduction planned from a further reduction in distribution costs and a new ERP system

• Encouraging feedback to new, bespoke product strategy for international markets

Pre-Close Trading Update

Unaudited net worldwide franchisee retail sales for the financial year to March 2021 were £326 million, which is £216 million (40 per cent.) below the prior year reflecting the impact of Covid-19 in the various markets in which our franchisees operate around the world. As a global brand the impact of Covid-19 has varied enormously by market as the countries in which our franchise partners operate have addressed the Covid-19 pandemic in many different ways including, but not limited to, restrictions on travel, movement and operating hours of retailers. These issues have been compounded by similar restrictions for our manufacturing partners, which coupled with the disruption to the global movement of freight, have caused additional challenges with availability of product for franchise partners further impacting sales for the year.

At the year end Mothercare had net debt of £12.1 million, being cash of £6.9 million against a substantial drawdown of £19.5 million from the new facility announced last November, reflecting both ongoing tight control of cash and the conversion of the total outstanding £19 million of shareholder loans into new ordinary shares on the 17 March 2021. Whilst we performed broadly in line with our expectations in the final period of the year, we now expect to report a small EBITDA profit, before adjusting items, for the year ended 27 March 2021 however we are not immune to the evolving Covid-19 impacts on our franchisees’ operations country by country.

During the period, the Financial Reporting Council conducted a review of the Mothercare plc Annual Report and Accounts to 28 March 2020. The Board is pleased to confirm the successful conclusion of the FRC’s review with no significant or material changes required or matters raised, particularly in the light of the complexities of those accounts reflecting both the placing into administration of Mothercare UK during the period and the impact of the pandemic on the conduct of the audit itself last spring. In the light of the FRC’s review, Mothercare will be amending the diluted EPS disclosure from continuing and discontinued operations in 2020. Further details will be set out in the notes to our 2021 Annual Report & Accounts.

We expect to release preliminary results for the year to 27 March 2021 in late July.

Business Strategy and Operational Update

We continue to work towards our goal of becoming an asset light business, greatly facilitated by the implementation of our new way of stock purchasing, meaning that our franchise partners contract to pay for products directly with our manufacturing partners. For the autumn/winter 2021 season currently in our supply chain some 55% of the products by value are invoiced directly to franchise partners by our manufacturing partners, thus removing the Group’s exposure to the debt and working capital requirement for these products. Hence for these products the creditors and stock will not be recognised by the Group and whilst the associated revenue will also be excluded there will be no material impact on the sterling margin earned. The responsibility for design, quality control and choice of manufacturing partner for these products remains with the Group. Also, for the autumn/winter 2021 season some 70% of the products by value, will be shipped directly from the country of manufacture to our franchise partners without passing through our warehouses.

We have targeted extending these ways of working to the remainder of our franchise partners and anticipate 80% of our products moving direct by the end of this current financial year and we continue to work to minimise costs for both ourselves and our franchise partners by moving activities further up the supply chain.

The National Distribution warehouse facility in Daventry, which predominantly serviced the Mothercare UK retail business, which was previously sublet to a third-party on a short-term basis, has now been fully assigned to a third party. This has removed a contingent risk of around £3 million per annum to the Group on a lease that expires in June 2026.

We are also progressing the development of a new ERP system designed to provide easier, more accurate and cost effective access to information to benefit our own business and those of our manufacturing & franchise partners. In the year ending March 2023, the first full year to benefit from the new system, our information technology costs would be expected to be reduced to close to half of those for the year to March 2021, which would result in a direct bottom line improvement of over £2 million.

During 2020 we also commissioned an in depth customer survey across many of our major territories to gain greater insight of our customers’ views on both the local Mothercare business and the relevant competitors. The analysis of the results has shown strong correlation across the sampled markets and has allowed us to clarify our product strategy both in terms of the specific categories we should focus on and the attributes of the products we need to emphasise. The revised product strategy will be much more geared to meet the expectations of our customers in our international markets, rather than majoring on products that were historically designed for the UK market. Our Spring/Summer 2022 season, which was the first to use these learnings, was presented to our franchise partners this month with pleasing initial positive feedback.

Outlook

The global outlook remains uncertain with the continued impact of Covid-19 being felt around the world but over 80 per cent. of our Franchise Partners' global retail locations are now open, which points towards recovery in their sales and consequently our revenues. Our plans are based upon continuing but reducing levels of disruption from the pandemic and on that basis the Directors believe that Mothercare remains on track to return to profitable trading levels in the short to medium term.

Taking into account these reducing impacts upon us and our franchise partners’ operations the implementation of the new operating model, greatly reduced cost structures and the elimination of significant legacy issues, the steady state operation of our retail franchise operations in more normal circumstances could return to annual operating profits of £15 million in future years. The further planned reduction in overheads and the continuing implementation of the asset light model will also support improving cash generation for the business.

Clive Whiley, Chairman of Mothercare, said:

"Our performance in 2021 shows that whilst we are not immune to the impact of the pandemic on our franchise partners' operations around the world, we have ended the year in a far stronger position than we started it. Our resilient performance and financial position bears out the robustness of the Mothercare business today, delivering what will be a positive if modest EBITDA result for the year. We enter FY22 as a conservatively financed, cash generative and profitable business.

We expect 2022 to be a year of further progress and we can now focus upon developing our strategy and future plans to optimise the competencies and attributes of Mothercare over the next five years. That is an exciting prospect for all of our staff and stakeholders as we hopefully exit this most uncertain of times."

Investor and analyst enquiries to:
Mothercare plc Email: investorrelations@mothercare.com
Andrew Cook, Chief Financial Officer
Kevin Rusling, Chief Operating Officer

Numis Securities Limited (Financial Advisor & NOMAD) Tel: 020 7260 1000
Luke Bordewich
Henry Slater

Media enquiries to:
MHP Communications Email: mothercare@mhpc.com
Tim Rowntree Tel: 020 3128 8789
Simon Hockridge