In yet another blow to the UK high street, Mothercare is the latest retailer to collapse into administration.
In truth, the writing has been on the wall for the children’s retailer for quite some time now; it has failed to compete with cheaper rivals and keep up with fast-changing shopping habits and tastes of consumers.
While it appears to be the usual tale of debt, depreciation and disaster, we’re going to take a deeper look into what happened and how it can act as another cautionary tale for retailers in an increasingly complex and competitive business environment.
A Downward Spiral
After a tough few years Mothercare announced last week that it had called in the administrators, risking 2,500 jobs if a buyer can’t be found. It has launched a huge closing down sale in preparation for shutting all its stores and online business.
This comes after Mothercare was rendered insolvent in 2018 and went through a company voluntary arrangement (CVA) in a last-ditch attempt to save the business.
But, as the BBC’s business correspondent Emma Simpson says, the CVA “wasn’t enough to turn things around. Mothercare ran out of time and money to try to revive its fortunes”. All of its 79 remaining stores are now vulnerable to closure.
Back in 2014, although the problems had already started with no dividends paid since 2012, there were plans to modernise the business — a £100m rights issue was an effort to secure Mothercare’s future.
The Financial Times reported at the time that the rights issue, as well as paying down debt “would transform the property-heavy group into ‘a digitally-led business”. The vision was a return to profitability within three years.
However, with hindsight, the focus of these efforts seems misguided. Instead of investing heavily in their online presence or innovative service lines, Mothercare wanted to change their store portfolio away from high street stores towards out-of-town retail parks and add in-store digitisation so that customers could view more products and customer reviews while they shopped. The plan failed miserably.
The Numbers Just Don’t Add Up
As a result, Mothercare’s finances have continued to weaken. Revenues have fallen nearly 30% since 2015, from £714m to £514m. Despite some very modest profits in 2016 and 2017, losses in the past couple of years have been unsustainable.
These accumulated losses rendered the company insolvent last year, with shareholder funds of -£49.4m and a net worth (after deduction of intangibles) of -£65.7m. Alongside this, there were long-term debts of nearly £90m and a working capital deficit of £5.6m.
In short, Mothercare had a perfect storm of too much debt, a big depreciation line from previous acquisitions that was hampering profitability in the short-term but also failing to support growth longer term, and flagging sales. The £100m raised in 2014 was spent without achieving very much, and there was no obvious route back to profitability.
The Reasonable Worst Case Comes True
Given this outlook, it is unsurprising that the auditors flagged material uncertainty about Mothercare being a going concern in the 2018 accounts. Despite this, the business was confident at the time that the CVA would be successful, allowing Mothercare to deliver its transformation plan.
But looking at the financial situation, it would clearly have been a real stretch to reach financial viability.
The picture was similar in 2019’s accounts, with auditors still flagging material uncertainty under the reasonable worst case. Even with an improved debt position and Mothercare complying with all its loan requirements, there was a significant risk to the group, its financial position, cashflows and liquidity.
This risk was driven by the troubles it faced in the UK market, as the international business of the group in countries including India and Russia continues to be profitable.
And so we arrive at last week, where finally Mothercare reached the end of the road for its UK business and called in the administrators.
Was the writing on the wall?
Mothercare’s UK business has been in trouble for a long time. The rights issue in 2014 aimed to transform the company into a ‘digitally-led business’, but the continued focus on bricks and mortar stores hindered a return to any meaningful growth or profitability.
This digitisation appears to have missed the root causes of Mothercare’s problems. Instead of providing dwindling in-store customers with iPads (most of whom have their own smartphones with them anyway), management should have been increasing and enhancing the online offer.
Celebrity collaborations with the likes of Jools Oliver and Myleene Klass were clearly not providing enough value to customers, when cheaper alternatives were so readily available on the high street, in supermarkets and online. Mothercare failed to adapt and find its place in the modern market.
Red Flag Alert Can Help You Manage Risk
Red Flag Alert is a business intelligence solution that provides real-time data on 6.5 million UK businesses. This helps business owners to avoid risk and spot opportunities for growth.
This is important because knowing as soon as possible when a company is struggling allows you to take steps to protect yourself from bad debt.
The collapse of a large retailer such as Mothercare can cause serious pain for its suppliers and creditors, especially if they haven’t adequately shielded themselves from this risk.
Less than a week after the collapse of Mothercare, close rival Mamas & Papas also announced that it had called in the administrators. While a company spokesman said this wasn’t linked to Mothercare’s collapse and that they had limited their debts to the company, Mamas & Papas is a major supplier to Mothercare.
Mothercare had one Red Flag, meaning it was in the weakest 20% in its size category. This elevated level of risk indicated that suppliers should have been seeking suitable assurances or guarantees.
Red Flag Alert goes the extra mile in evaluating risk for our customers. We not only have the best algorithm to analyse and assess risk factors, but we also have experts collating, analysing and digesting data to generate financial health ratings that accurately predict insolvency.
To find out more about how Red Flag Alert can help you spot when companies may be a trading risk, get in touch with Richard West on firstname.lastname@example.org or 0344 412 6699.