MARKET COMMENT
The Magic Of Disney Comes to Mothercare

By David Kuo (TMFDragon)
November 21, 2002

Even before the man from Disney (NYSE: DIS) has had a chance to work his magic, the turnaround at Mothercare (LSE: MTC) already seems to be in place. Ben Gordon, the managing director of Disney Stores, does not assume his role as chief executive until 2 December. But already the mothers-to-be and toddlers' retailer is showing signs of improvement. It would be uncharitable to say that Gordon is moving from one Mickey Mouse outfit to another but the problems at Mothercare, it should be said, were largely self-inflicted. Any retailer worth its salt should recognise that warehousing and distribution is a vital part of the distribution chain. If you get this part of the value chain wrong, then there is little chance that the rest of company can function efficiently.

Mothercare's move to a new warehouse was the last stage of its re-organisation following its disposal of Bhs. The transition to the new storage depot was made in August 2001 but significant difficulties were being experienced even at that stage. Bottlenecks in the distribution channel invariably lead to overstocking and in turn lower margins as clearance of stocks are sold at lower prices. This is precisely what happened at Mothercare. Today's results showed that first-half sales rose 0.8% to £228m but margins declined 0.8%. Additionally increased distribution costs impacted profitability resulting in an underlying loss of £10m compared to a profit of £4.8m last year. Elsewhere some unseasonably warm weather in September affected sales of autumn ranges. This resulted in below par like-for-like comparisons. Same-store sales fell 2.1% at Mothercare's UK shops.

Mothercare reckons that the outlook for sales is more positive. It has trimmed back on its product range to streamline its offerings. With stock levels in sync with sales it has been able to scale back on promotional offers. This has helped to boost turnover and also strengthen margins. However the road to full recovery will not be an easy one, which makes valuing this company slightly more tricky. There is little doubt that Mothercare has had to endure a traumatic two years following its breakaway from Bhs. But this will be nothing in comparison to the work that needs to be done to lure customers back into its shops. At present Mothercare is on a forward valuation of 12 implying that it should make a profit of £8m in 2003. However a lot will depend on Ben Gordon transferring his Disney-learnt marketing skills to Mothercare.