Mothercare chief executive ousted after fourth profits warning in under a year

Renewed turmoil at children's clothing retailer sparks fresh takeover speculation

By Nigel Cope,City Editor
Sunday 15 December 2013 03:44
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Mothercare, the retailer of children's clothing and nursery products, issued its fourth profits warning in less than a year yesterday and announced that its chief executive was leaving with immediate effect. Shares in the company plunged 23 per cent to 119.25p valuing the business at just £88m.

Analysts said the company may now be a takeover target with Terry Green, the former Bhs chief executive, cited as one possible candidate. Another possible bidder is Philip Green, who has made a fortune from the acquisition of Bhs. He refused to reveal his hand yesterday saying: "I can't say I'm not interested because I'll have the Stock Exchange on to me telling me I can't bid for six months. But at the moment who knows where this is going to end. Nothing's getting more expensive is it? I'm going on holiday."

Investors criticised the board of directors saying Mothercare's biggest problem had been "serial mis-management". A £470,000 pay-off for the departing chief executive Chris Martin was singled out for attack. "It has strong overtones of rewards for failure," one institutional shareholder said.

The latest warning is part of the seemingly remorseless decline of Mothercare which was once seen as the shop of choice for pregnant women and young mothers. Its markets have gradually been invaded by slicker rivals who have outmanoeuvred Mothercare on price, fashionability and quality of service.

Major supermarkets such as Tesco and Asda have been targeting baby clothing and children's equipment with big sales pushes. Other rivals such as Gap, Next, Hennes & Mauritz and Gymboree are seen as much more fashionable in clothing. In toys, a revitalised Early Learning Centre as well as "category killers" such as Toys 'R' Us have taken market share.

Rowan Morgan, a retail analyst at Teather & Greenwood, summed up the mood yesterday. "How you can't make money out of a business like this with 750,000 pregnancies a year just beggars belief. The real nightmare is that they are just not doing the sales. You begin to wonder where the rot stops."

Mothercare's trading statement showed a further deterioration in turnover which has been under pressure ever since the botched opening of a new distribution centre last year.

Underlying sales in the 14 weeks to 12 July were down by 3.1 per cent on the same period last year. Gross margins were down by 0.5 per cent. Losses for the first quarter were £5.4m, double City expectations. The group will continue to be loss-making in the first half with analysts forecasting losses of £8.5m.

Explaining the poor trading, Mothercare said: "Since late May, anticipated improvements in clothing sales have not been achieved, particularly in the high street stores. This, together with the additional markdowns necessary to clear surplus stocks, has significantly affected performance." The company said these trends had continued with particularly poor sales of baby clothing.

The warning has cost Chris Martin his job as chief executive after two years in the post. Ian Peacock, the MFI chairman, will replace Alan Smith as Mothercare's chairman and lead the search for a new chief executive. "Chris felt his position was untenable that he could no longer lead the troops," a company spokeswoman said.

Institutional investors criticised the level of remuneration paid to a team which has failed to deliver. Mr Martin will receive one year's money as severance, including pension payments and an average of the last three years bonuses.

Other controversial payments have included a £630,000 bonus paid to Mr Smith for his part in restructuring the old Storehouse group. This involved selling Bhs to the retail entrepreneur Philip Green two years ago for a knock-down £200m. The old Storehouse business was then renamed Mothercare plc. Bhs has since been valued at £1bn.

Mothercare's problems are legion. It has 245 UK stores but only 63 of these are out of town leaving it over-reliant on its 180 high street stores which are too small to stock large ranges of nursery equipment. Its clothing ranges have failed to compete with more fashionable competitors and the business is run by a board which has been dominated by male accountants. Mothercare does not have a single woman among its executive directors. It recently appointed a new product director, but this too was a man, the former Uniqlo and Marks & Spencer director, Steve Pomfret.

Other shortcomings have included a failure to capitalise on the strength of the brand's high recognition with young mothers and a failure to market adequately to its customer base. Its staff are often too young and inexperienced to offer adequate advice. The botched opening of a new warehouse last year resulted in serious stock availability problems.

Analysts said the decline of the group had come despite the fact that research has shown that the vast majority of new mothers visit its stores. As one mother said yesterday: "It's the shop you go to because of its name. But quite often you come away without buying anything. For the bigger items I'd go to John Lewis. For toys I think Early Learning Centre is better. For clothes you can go to the supermarkets for basics and Gap and H&M for other things."

Another mother said: "You'll ask an assistant for help and they won't know the answer. You'll try to take something back and it will be a nightmare. In the end, you give up."

However, Richard Hyman, the head of Verdict, the retail consultancy, said Mothercare still has a future. "I think Mothercare is the big opportunity in UK retailing. It's a great brand. And most pregnant women and mothers go there," he said.

He said the company suffered from basic problems, such as stores being too small and crowded to even wheel a pram around. "Its big out of town stores are good but it is hampered by its smaller ones which cannot offer the full range. The result is that they have no authority in anything."

Mothercare was founded in 1961 by the entrepreneur Selim Zilkha. The business floated in 1972 and enjoyed a successful spell helped by popular advertising slogans such as "Mothercare goes up to 10".

But its life as a publicly quoted company has not been a happy one. When Mothercare merged with Terence Conran's Habitat in 1982, commentators joked that the new business should be called Babitat.

The creation of Storehouse after the subsequent merger with Bhs in 1986 brought a series of problems and a succession of managers. One of the more successful was Ann Iverson, the American who later became chief executive of Laura Ashley.

Now, though, the business may be a takeover target as it struggles to make a return on sales of more than £400m a year. According to Verdict's Mr Hyman, this may be no bad thing. "It needs to be taken private while it is put right."

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