Bombed-out Mothercare offers hope

Investors holding out for a Mothercare (MTC) recovery were given some hope today as the retail chain revealed its strategy for a firmer financial footing.

Taking the now well-trodden path of a Company Voluntary Arrangement (CVA), Mothercare wants to exit about 50 stores and achieve material rent reductions on a further 21. Where the company had 400 UK outlets at the start of this decade, it now plans to operate from just 78 by the 2020 financial year.

Mothercare admitted today that the burden of some of its legacy loss-making stores had left the company in a “perilous” and “unsustainable” position. It thinks the moves will eliminate losses of at least £10 million a year.

Approval for the CVA will be key to the company’s future as this will trigger a £28 million fundraising through a new equity issue later this summer, as well as the agreement of fresh debt facilities worth £67.5 million.

In addition, shareholder and other loans should provide immediate access to up to £18 million to meet short-term liquidity requirements, demonstrating continued support for the company.

The plan will be overseen by Mark Newton-Jones, who returns to the group as chief executive just a month after leaving Mothercare. His replacement at the time, former Tesco (TSCO) executive David Wood, will now become managing director.

The changes were welcomed in the City, with Mothercare shares up by more than a fifth to 26p. That’s the highest level since March and represents a near doubling in value for brave investors who took a punt on the stock at its all-time low two months ago.

As well as getting the CVA approved by landlords and certain creditors, much will now depend on the mood of the consumer. There’s some encouragement on that front, at least, with wages now growing at a faster pace than inflation.

Source: interactive investor        Past performance is not a guide to future performance.

The chain will also need to fight harder online and ensure that its international operations continue to be a cornerstone of profitability.

It has a cash generative franchise business model with 1,131 stores in 48 countries, but the division has experienced headwinds in some markets in recent years, particularly the Middle East.

Across the group, the company thinks that its turnaround strategy unveiled in 2014 was the right one but that its execution was too slow and expensive.

Interim chairman Clive Whiley, who recently took on the role from Alan Parker, said: “We need to move faster, be more efficient and improve our focus on cash generation and returns.”

At the end of the 2017/2018 financial year, Mothercare had net debt of £44.1 million against existing committed bank facilities of £62.5 million. However this was scheduled to reduce to £50 million in November in addition to a £5 million uncommitted overdraft facility.

The company admitted in March that it faced the prospect of breaching certain covenants on lending facilities, as well as reaching the limits of financing facilities in total.

A subsequent financial review concluded that delivering the refinancing and the CVA proposals were “absolutely vital to the future for Mothercare”.

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