Interim Results

Mothercare PLC 16 November 2001 EMBARGOED UNTIL 0700 ON FRIDAY 16TH NOVEMBER 2001 16 November 2001 MOTHERCARE PLC - INTERIM RESULTS STATEMENT Interim results for the 28 weeks ended 13 October 2001 * Sales up 6.8% to £226.2m (H1 2000: £211.8m) like for like growth 5.9% * PBT £4.8m* (£4.0m*), operating profit up 116% at £3.9m (£1.8m) * Margin growth of 2.1% points * Warehouse issues giving rise to a £4m exceptional charge * Stock levels now improving * Interim dividend 1.0p (nil) *before exceptionals Commenting on the results, Chief Executive, Chris Martin said: 'We are encouraged that the fundamentals of the business are responding to the recovery programme. Successes include our new clothing range, the strength of our home, travel and toy product areas, and the performance of our Mothercare World stores.' 'We are, however, very disappointed that the problems at the warehouse will take longer to resolve than initially anticipated. The impact of this means pre-exceptional profits this year will be lower than expectations.' 'Going forward we continue to be encouraged by the significant opportunity for Mothercare to deliver growth as a specialist retailer through growing sales densities and continued margin improvements.' Enquiries: Chris Martin Mothercare plc 020 7404 5959 (for today only) Caroline Whitelegge Susan Gilchrist Brunswick Group 020 7404 5959 Alex Ranson A meeting for analysts will be held this morning at 0900 for 0915 at The Lincoln Centre, 18 Lincoln's Inn Fields, London WC2. Financial results An encouraging performance and key successes in the first half clearly demonstrate that the business is continuing to respond to the recovery programme. Disappointingly, start up problems with the new warehouse impacted the performance of the business in the last 4 weeks of the first half. The business achieved an operating profit of £3.9 million (£1.8 million), with profit before tax and exceptional items up by 20 per cent to £4.8 million (£4.0 million). Sales increased by 6.8 per cent to £226.2 million, an increase of 5.9 per cent on a like-for-like basis. Gross margin increased by 2.1 percentage points. Operating profit from UK stores was £2.1 million (£1.4 million) on sales of £199.8 million. The overseas franchise business, Mothercare International, increased sales by 4.7 per cent to £19.1 million and achieved an operating profit of £1.9 million (£1.0 million). Mothercare Direct, comprising the catalogue and website, achieved strong growth, with sales up by 87.9 per cent to £7.3 million. The Direct business, as expected, made an operating loss of £0.1 million (£0.6 million loss) in the first half and will move into profit in the second half. Due to the major difficulties experienced with the transition to the new warehouse, additional costs associated with the operation of temporary warehousing and deliveries direct from suppliers to stores have been incurred. An exceptional charge of £4.1 million has been taken in the half year to cover the cost of operating these contingencies through the Christmas trading period, a longer period than had been previously anticipated. During the first half, the business continued to invest in staffing levels and training to drive standards and service. Together with higher rent and rates, and the running costs of Mothercare.com, this contributed to an increase in cost growth as planned, of 10.2%. Cost growth is expected to be lower in the second half. Earnings per share for the continuing business before exceptional items was 7.1p (1.4p). The board has recommended an interim dividend of 1.0p. The balance sheet remains strong and continues to support the investment required to rebuild the business, including the roll-out of the large store format which will start in March 2002. Recovery programme - phase two Mothercare is part way through its phased recovery programme, which is building the foundations for the business to achieve its vision: to be the leading specialist retailer for mothers-to-be and parents of young children, with expertise and service at the heart of the offer. Progress in the first half re-affirms that the business is responding to the recovery programme, despite the temporary adverse impact of the new warehouse. Supported by an ongoing drive to improve service and operating standards, the priority actions behind the year-long second phase of the recovery programme, which commenced in March 2001, have been: - the launch and performance of the Autumn/Winter 2001 clothing range - the roll-out of the large store Mothercare World format from January 2002 - moving to the new warehouse in August 2001 Warehouse As highlighted at the trading update in early October, the move to the new warehouse in Daventry, operated by Tibbett & Britten, took place on 18 August 2001. However, in early September, it became apparent that productivity levels within the warehouse were well below those planned, leading to severe stock availability problems in stores. Contingency distribution routes were put in place. As the senior teams of Mothercare and Tibbett & Britten worked through the problems, it became clear that errors in stock location within the warehouse had occurred, the extent of which were greater than first thought. Stock flow through the warehouse is gradually being rebuilt from a clean base. This process is taking time and consequently, within the plan presented by Tibbett & Britten, it is not expected that the warehouse will reach normal operational levels until January. Additional contingencies have been put in place to protect stock flow for Christmas, including direct deliveries from suppliers and additional warehouse facilities. These contingencies will remain in place throughout the Christmas trading period, a longer period than anticipated. The additional cost of these contingencies has been charged as an exceptional item in the first half. Product The customer response to the relaunch of Mothercare's clothing ranges this Autumn has been positive, with particularly encouraging trends and market share gains seen in maternity and children's fashion. Improvements have been and will continue to be driven through focusing on core lines, reducing the number of options within the range and more direct sourcing. In the period to 28 September, the home, travel and toy product areas continued to perform well. Although performance in these areas has since been significantly impacted by availability issues arising from the problems at the new warehouse, the sales trend has improved in recent weeks with increased stock levels and availability. Channels UK stores The Mothercare World chain continues to perform strongly. We have been developing a new generation of Mothercare World stores with our trial format at Milton Keynes and Kew, and the recent reopening of Rotherham. These model stores have achieved improved sales densities and provide the blueprint for Mothercare World to be rolled-out in the new financial year. Four new out-of-town sites at Manchester, Bradford, Walsall and Bristol have been secured during the first half. These four new store openings in 2002/03 will represent the first stage of the Mothercare World roll-out programme and work to identify further sites is continuing. International Mothercare International has performed well in the first half. It has continued to focus on developing a small number of core territories by consolidating and strengthening relationships with key franchise partners. Relationships with franchisees are moving increasingly to royalty-based arrangements in order to drive sales more effectively. There remains a significant opportunity to drive the international business going forward. Mothercare Direct Mothercare Direct has continued to grow very strongly and is on track to break even in the current year. Catalogue sales increased by 50.6 per cent in the first half while Mothercare.com is currently attracting up to 80,000 hits per week. Operating standards and service The benefits of an ongoing drive to improve service and operating standards throughout the business are starting to become evident. A strong emphasis continues to be placed on the training and development of people as a result of which service standards have improved significantly: labour turnover in stores has been reduced by 17 percentage points to 40 per cent and the proportion of full time staff in stores has increased from 8 per cent to 30 per cent since May. This has been a major driver in increasing average customer spend by 5 per cent. The progress being made in providing a better service to customers was recently recognised when Mothercare received three awards from Mother and Baby magazine, including that of 'Retailer of the Year Award' for 2001/02, as voted by the magazine's readers. Current trading Stock availability problems arising from the operational issues at the warehouse have impacted sales in the current period. UK sales in the first four weeks of the second half declined by 4.3 per cent (4.5 per cent on a like-for-like basis). Total sales for the period declined by 7.6 per cent. This was due to the decision to halt temporarily international shipments of stock to prioritise deliveries to UK stores. In light of the impact of the warehouse on performance and costs, profits for the full year are expected to be lower than expectations. INTERIM RESULTS For the 28 weeks ended 13 October 2001 (2000 - 28 weeks ended 14 October) Before Exceptional Exceptional items Notes items Note 2 Total 2001 2001 2001 £m £m £m Mothercare continuing 226.2 Bhs discontinued - _____ Turnover 226.2 - 226.2 _____ ____ _____ Mothercare continuing 3.9 Bhs discontinued - ___ Profit from retail operations 3.9 - 3.9 Exceptional items 2 - (4.1) (4.1) Interest 3 0.9 - 0.9 _____ ____ _____ Profit/(loss) before 4.8 (4.1) 0.7 taxation Taxation 4 - - - _____ ____ _____ Profit after taxation 4.8 (4.1) 0.7 _____ ____ _____ Dividend per share 5 1.0p Earnings per share - 6 Basic 1.0p Diluted 1.0p INTERIM RESULTS For the 28 weeks ended 13 October 2001 (2000 - 28 weeks ended 14 October) Before Exceptional Exceptional items items Note 2 Total Total 2000 2000 2000 31 March 2001 £m £m £m £m Mothercare continuing 211.8 419.1 Bhs discontinued 89.9 89.9 _____ ______ Turnover 301.7 - 301.7 509.0 _____ ____ _____ _____ Mothercare continuing 1.8 (0.3) Bhs discontinued (6.7) (6.7) _____ _____ Profit from retail operations (4.9) (7.4) (12.3) (7.0) _____ _____ Exceptional items - 12.3 12.3 12.3 Interest 2.2 - 2.2 3.1 _____ ____ ____ _____ Profit/(loss) before taxation (2.7) 4.9 2.2 8.4 Taxation (1.2) 1.2 - - _____ ____ ____ _____ Profit after taxation (3.9) 6.1 2.2 8.4 _____ ____ ____ _____ Dividend per share Nil p 1.5p Earnings per share - Basic 1.1p 6.0p Diluted 1.1p 6.0p Mothercare Continuing business before exceptional items 13 October 14 October 31 March 2001 2000 2001 £m £m £m Turnover 226.2 211.8 419.1 _____ _____ _____ Profit from retail operations 3.9 1.8 7.1 Interest 0.9 2.2 3.1 _____ _____ _____ Profit before tax and exceptionals 4.8 4.0 10.2 _____ _____ _____ Earnings per share 7.1p 1.4p 6.5p _____ _____ _____ GROUP BALANCE SHEET As at 13 October 2001 (2000 - 14 October) 13 14 October 31 March October 2000 2001 Notes 2001 £m £m £m Fixed Assets Tangible fixed assets 85.3 86.5 87.7 Investments 4.9 4.3 4.3 _____ _____ _____ 90.2 90.8 92.0 _____ _____ _____ Current Assets Stocks 43.7 38.4 43.6 Debtors 27.4 30.6 32.4 Cash at bank and in hand and 32.6 42.3 36.8 time deposits Creditors: amounts falling due 7 (57.1) (71.2) (71.0) within one year _____ _____ _____ Net Current Assets 46.6 40.1 41.8 _____ _____ _____ Creditors: amounts falling due 7 (2.6) (2.6) (2.4) after one year Provisions for liabilities and 8 (7.2) (6.5) (4.4) charges _____ _____ _____ Net Assets 127.0 121.8 127.0 _____ _____ _____ Capital and reserves attributable to equity interests Called-up share capital 35.3 35.3 35.3 Profit and loss account 91.7 86.5 91.7 _____ _____ _____ 127.0 121.8 127.0 _____ _____ _____ NET CASH /EQUITY % 25.3% 32.7% 27.4% ANALYSIS OF NET CASH 13 October 14 October 31 March 2001 2000 2001 £m £m £m Cash at bank 32.6 42.3 26.8 Time deposits - - 10.0 Obligations under finance leases: - short term (0.5) (2.0) (2.0) - long term - (0.5) - _____ _____ _____ 32.1 39.8 34.8 _____ _____ _____ RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' FUNDS 13 October 14 October 2001 2000 £m £m Profit for the financial period 0.7 2.2 Dividend (0.7) - Opening shareholders' funds 127.0 225.6 Scheme of arrangement - reduction of share capital - (106.0) _____ ______ Closing shareholders' funds 127.0 121.8 _____ ______ GROUP CASH FLOW For the 28 weeks ended 13 October 2001 (2000 - 28 weeks ended 14 October) 28 weeks ended 28 weeks ended 52 weeks ended 13 October 2001 14 October 2000 31 March 2001 £m £m £m Profit/(loss) from retail operations 3.9 (4.9) 0.4 before exceptional items Depreciation 6.2 13.4 18.5 Working capital (0.6) 9.6 13.5 Exceptional costs/other (6.9) (14.9) (28.3) ____ ______ ______ Net cash flow from 2.6 3.2 4.1 operating activities (Note 9) Returns on 0.9 2.2 3.1 investments and servicing of finance Taxation 0.1 2.3 2.9 Capital (4.8) 0.2 (5.9) expenditure (Note 9) ____ ______ ______ (1.2) 7.9 4.2 Acquisitions and disposals Disposal of Bhs - 208.9 208.9 Acquisition of own (0.5) (2.5) (3.8) shares by Employee Trust ____ ______ ______ (0.5) 206.4 205.1 ____ ______ ______ Equity dividends paid (1.0) - - ____ ______ ______ (2.7) 214.3 209.3 Management of 10.0 36.3 26.3 liquid resources Financing Scheme of arrangement - (105.1) (105.1) -reduction in share capital Other (1.5) (10.3) (98.0) ____ ______ ______ (1.5) (115.4) (203.1) ____ ______ ______ Increase in cash 5.8 135.2 32.5 in the period ____ ______ ______ RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS Increase in cash 5.8 135.2 32.5 in the period Cash flow from (10.0) (36.3) (26.3) liquid resources Cash flow from 1.5 10.3 98.0 financing ____ ______ ______ Movement in net (2.7) 109.2 104.2 funds/(debt) in the period Net funds (debt) 34.8 (69.4) (69.4) at the beginning of the period ____ ______ ______ Net funds at the 32.1 39.8 34.8 end of the period ____ ______ ______ NOTES 1. ACCOUNTING POLICIES This interim report has been prepared under the historic cost convention and using accounting policies which are consistent with previous years, except for accounting for deferred tax where the new accounting standard, FRS 19 'Deferred tax' has been adopted by the directors in this interim report. This Standard requires that deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Previously the group's accounting policy was to provide for the tax which was likely to be payable or recoverable. There has been no financial impact on the results of the group as a consequence of this change in accounting policy as the group has tax losses which have previously not been recognised. See note 4 for more details. 2. EXCEPTIONAL ITEMS The group has undergone a fundamental re-organisation in relation to the disposal of Bhs, which occurred in May 2000. The final financial settlement in connection with this disposal was in line with expectations. The last stage of the re-organisation was the move to a new warehouse, operated by the contractor, Tibbett & Britten, which began despatching to stores in August 2001. Significant difficulties have been experienced with the transition to the new warehouse and, as a result, additional costs have been incurred through the need to operate temporary warehousing and to deliver goods directly from suppliers to stores. The additional costs provided (£4.1 million) are based on these temporary solutions being required until the end of 2001. In the half year to 14 October 2000 exceptional items were charged to operating profit in relation to the start up of Mothercare.com (£7.4 million). The exceptional credit of £12.3 million represented the net profit on disposal of stores (£3.4 million) and the continuing costs of separation (£9.9 million) and adjustments (£18.6 million) in respect of the loss on the Bhs disposal. The tax effect of the exceptional item is £nil (2000 - credit £1.2 million). 3. INTEREST Interest 28 weeks ended 13 28 weeks ended 52 weeks ended comprises: October 2001 14 October 2000 31 March 2001 £m £m £m Interest receivable 1.0 3.4 4.3 Interest payable - (1.1) (1.1) Obligations under (0.1) (0.1) (0.1) finance leases _____ _____ _____ 0.9 2.2 3.1 _____ _____ _____ 4. TAX As set out in note 1, the directors have adopted FRS 19 in this interim report. The only significant timing differences impacting the group are accelerated capital allowances and tax losses generated in prior years which are available to offset future profits. As a result of the adoption of FRS 19 the tax losses have been recognised to the extent of any deferred tax liabilities. No further deferred tax asset has been recognised for the remaining losses of £17 million (2000 - £23 million) as the directors are of the opinion, that there is sufficient uncertainty over the recoverability of these losses against future taxable profits such that in accordance with FRS 19 it is not appropriate to recognise any further asset at this time. This position will be reviewed at the year end and future balance sheet dates. Current tax is calculated at nil per cent (2000 - nil per cent) being the estimated effective rate of tax on profit for the 52 weeks ending 30 March 2002. The tax charge has been reduced by the availability of tax losses that have arisen in prior periods. 5. DIVIDEND An interim dividend of 1.0p per share has been proposed (2000 - nil p). The dividend will be payable on 12 February 2002 to shareholders on the register on 11 January 2002. The cost of the dividend will be £0.7 million. 6. EARNINGS PER SHARE 28 weeks ended 13 28 weeks ended 52 weeks ended October 2001 14 October 2000 31 March 2001 Weighted 67.2m 197.8m 138.8m average number of shares in issue Dilution: Option schemes 1.1m - 0.3m _____ _____ _____ Diluted weigted 68.3m 197.8m 139.1m average number of shares in issue _____ _____ _____ Profit after tax £0.7m £2.2m £8.4m Continuing business £4.8m £2.8m £9.0m profit after tax before exceptional items Earnings per share: - Basic 1.0p 1.1p 6.0p - Diluted 1.0p 1.1p 6.0p - Continuing business 7.1p 1.4p 6.5p before exceptional items The earnings per share of the continuing business before exceptional items has been shown to provide an indication of the underlying profitability of the business. It is calculated by dividing the profit after tax but before exceptional items of the continuing Mothercare business by the weighted average number of shares in issue during the period. 7. CREDITORS 13 October 14 October 31 March 2001 2000 2001 £m £m £m Due within one year ___________________ Obligations under finance leases 0.5 2.0 2.0 Trade creditors 17.5 19.2 22.3 Proposed dividend 0.7 - 1.0 Current taxation 11.1 12.9 11.0 Payroll and other taxes, 0.9 0.8 1.5 including social security Accruals and deferred income 25.0 35.0 31.9 Landlords' contributions 1.3 1.0 1.1 Other creditors 0.1 0.3 0.2 ____ ____ ____ 57.1 71.2 71.0 ____ ____ ____ Due after one year __________________ Obligations under finance leases - 0.5 - Landlords' contributions 2.6 2.1 2.4 ____ ____ ____ 2.6 2.6 2.4 ____ ____ ____ 8. PROVISIONS FOR LIABILITIES AND CHARGES Disposal Re-organisation provisions provisions Total £m £m £m Opening balance 0.1 4.3 4.4 Charged in the - 4.1 4.1 period Utilised - (1.3) (1.3) ____ _____ _____ Closing balance 0.1 7.1 7.2 ____ _____ _____ The re-organisation provisions principally represent the costs of the Mothercare store disposal programme and the additional provision charged in the period in relation to the new warehouse, as set out in note 2. 9. ANALYSIS OF MOTHERCARE CONTINUING BUSINESS CASH FLOW FROM OPERATIONS 28 weeks 28 weeks 52 weeks ended 13 ended 14 October ended 31 March October 2001 2000 2001 £m £m £m Profit/(loss) from 3.9 1.8 7.1 retail operations Depreciation 6.2 6.3 11.4 Working capital (0.6) 6.0 9.9 Exceptional (6.9) (10.9) (24.3) costs/other _____ ______ ______ Net cash flow from 2.6 3.2 4.1 operations _____ ______ ______ Capital expenditure Purchase of (4.8) (4.9) (11.2) tangible fixed assets Sale of tangible - 9.3 9.5 fixed assets _____ ______ ______ (4.8) 4.4 (1.7) _____ ______ ______ These interim results were approved by the Directors on 16 November 2001. Results for the two half years have not been audited, but have been reviewed by Arthur Andersen. The financial information contained in the interim accounts does not constitute statutory accounts as defined in Section 240 of the Companies Act. The full year comparatives were extracted from the full Group Accounts which have been filed with the Registrar of Companies together with an unqualified auditors' report. All shareholders will receive a copy of the interim results.

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