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 26 March 2022. This update is based upon draft figures pending finalisation of the year end audit.
Highlights
Unaudited net worldwide sales of £385 million for the year significantly impacted by varied experiences of Covid-19 in franchisee markets
Adjusted EBITDA of £11.5 to £12 million for FY22, ahead of analysts’ expectations
Marginally reduced net debt of £10.3 million at the year end
Pension deficit materially reduced to £66 million (March 2020: £124.6 million)
Encouraging initial feedback from recent focus on product quality and design reinforcing our confidence to accelerate growth in both existing and new markets.
Current Trading
We are pleased to report that EBITDA before adjusting items is now expected in the range of £11.5 to £12 million for the financial year to 26 March 2022, reflecting a number of factors.
The performance for the year as a whole will reflect some one-off benefits. These include the impact of margin deferred to the year just ended as a result of the previously highlighted delays in shipping at the end of our previous financial year and net releases of provisions made in prior years, together totalling approximately £1.5 million.
Unaudited net worldwide franchisee retail sales of £385 million, whilst 7% higher than the levels for previous financial year, are still significantly impacted by Covid-19. Retail sales remain below the levels we would otherwise expect and are around 25% down on the total retail sales for similar territories in the year before the pandemic. Online retail sales represented 10% of our total retail sales, slightly down on the 12% for the previous financial year reflecting lower levels of Covid-19 restrictions on store openings, but still above the levels achieved in the period before the pandemic.
On 9 March 2022 Mothercare announced that our franchise partner’s retail business in Russia (116 stores and online) had been suspended. £88 million of our annual retail sales came from Russia and the territory directly contributed around £5.5 million to adjusted EBITDA for the year.
Outlook for FY23 & beyond
Taking the above considerations into account we approach the new financial year with a degree of cautious confidence, notwithstanding that we have completely excluded Russia from our forecasts given the uncertainty around when stores may reopen. We expect this to impact our results for the financial year to March 2023 by £6 million as previously guided. Our Russian franchise partner has continued to pay the salaries of the team in full despite the suspension of sales in the market. We are making the necessary adjustments to our cost base to maintain our service and costs for our franchise partners and this financial year will potentially be impacted by the timing differences as we adjust our cost base.
As previously reported we have been upgrading our clothing ranges and are now offering great choice at a variety of price points, improved design, fashionability, quality and value. We believe this approach will result in clearer differentiation from our international competitors’ offerings. The first full season that this upgraded product range was available for our customers, was spring/summer 2022, which launched in January this year. The initial feedback has been very positive but we are aware that many of our territories still face challenges including ongoing Covid-19 restrictions and the need to clear old inventory from previous seasons as a result of supressed demand. We also appreciate that it may take a number of seasons for consumer confidence to return and thus sales to fully reflect the enhanced ranges. It is therefore difficult at this early stage to project forward and quantify the resultant impact on retail sales.
Covid-19 has had a significant impact on all of our franchise partners’ profitability. Inevitably this has resulted in a need for them to reduce costs and the levels of investment they have been able to make in their businesses. This is likely to mean that the return to pre pandemic levels of trading may take longer and in some cases we may directly contribute to achieve that recovery, which will benefit both our own business and our franchise partners’ businesses in the longer term.
Our new ERP project is progressing well with the product lifecycle management system in its final phase of testing and due to go live next month. The remainder of the system has faced the almost inevitable delays associated with a project of this size and is currently due to be live at the end of this calendar year. The full savings will therefore not be seen until the financial year ending March 2024, although the contract for the creation of the ERP is on a fixed cost basis so will not increase commensurate with the delay.
Our updated medium-term guidance for the steady state operation in more normal circumstances of our continuing franchise operations is that they are capable of exceeding £10 million operating profit on the most prudent basis of excluding any contribution from the Russian business. With encouraging results from our recent efforts on product design we remain focused on accelerating our growth in both existing and new markets.
Financing
At the year-end Mothercare had total cash of £9.2 million (March 2021: £6.9 million), reflecting ongoing tight control of cash, against the £19.5 million of the Group’s existing loan facility, which remained fully drawn across the year. This modest reduction in net debt, against the challenging backdrop of the pandemic upon the business, demonstrates our progress as a focused, asset light, global franchising business with no directly operated stores and greatly reduced direct costs.
In addition, the warrants issued to certain of the Group’s shareholders in relation to the CULS arrangements, which were announced on 16 March 2021, expired unexercised on 17 March 2022 reducing anticipated cash receipts by £1.8 million.
When we completed the £19.5 million secured four-year loan facility with Gordon Brothers Brands LLC (‘GBB”), in November 2020, it was against a backdrop of considerable change and uncertainty. Accordingly, we commenced refinancing discussions with GBB earlier this year to reduce the cash financing cost to a level more appropriate for a capital light, cash generative and profitable business. These refinancing discussions are ongoing and the Group remains in compliance with the terms and covenants of the existing loan facility notwithstanding the impact of the suspension of our franchise partner’s Russian operations. However, as the Board’s current forecasts for continuing operations show the Group requiring waivers to future periods’ covenant tests and to vary, renegotiate or refinance this debt facility, we are looking at various financing alternatives (including equity and equity linked structures) to give us both additional flexibility and reduced cash financing costs. For the avoidance of doubt the Group does not require (and is not seeking through this refinancing) additional liquidity.
Pension Schemes
The last full actuarial valuation of the schemes was at 31 March 2020 and showed a deficit of £124.6 million, resulting from total assets of £383.7 million and total liabilities of £508.3 million. Based on desktop projections of this valuation provided to the pension scheme trustees, as at 30 October 2021 the deficit had reduced to £91 million and had fallen by a further 27.5% to £66 million as at 28 February 2022 with total assets at £412 million and total liabilities of £478 million.
Due to the Group’s reduced cash generation primarily as a result of the suspension of the Russian business, we have notified the schemes’ Trustees that we will not be making the first instalment of the deficit repayment contributions due this month in full and would like to enter into discussions to revise the repayment schedule. All contributions for the year to 31 March 2022 have been made in full and on time. The total annual contribution due for the year to March 2023 is £9.0 million. The Trustees have responded and the discussions have commenced with the provision of forecasts and information to the Trustees and their advisors.
The current recovery plan included payments in the financial years to: March 2022 £4.1 million March 2023 £9.0 million; March 2024 £10.5 million; March 2025 £12 million; March 2026 to March 2030 £15 million each year and March 2031 £3.3 million.
Notwithstanding the excellent, mutually beneficial relationship fostered with the scheme Trustees since 2018, there can be no certainty as to the outcome of the discussions despite the deficit nearly halving since the last valuation with the next full actuarial valuation due in March 2023. We are also exploring the possibility of reducing the quantum or uncertainty of subsequent recovery plan contributions through alternative means.
Clive Whiley, Chairman of Mothercare, commented:
“As expected last year was one of further progress for Mothercare, generating free cash flow from operations as a focused, asset light global franchising business. Whilst we must now deal with the impacts of the suspension of our franchise partner’s operations in Russia, we retain the resilience to deal with this additional challenge satisfactorily.
We continue to drive initiatives designed to maintain momentum in improving profitability particularly when we return to more normal pre-pandemic levels of business. The near halving of the pension deficit also offers the potential for material reductions in our recovery plan payments. This is a good backdrop against which to revisit our current financing arrangements and we are exploring all available alternative funding options to further improve our financial flexibility.
Finally I would like to thank, on behalf of the board, all of our colleagues, franchisees and product suppliers for their efforts in what has been another extraordinary year.”
