Final Results

RNS Number : 0256V

Mothercare PLC

22 May 2008

 



Mothercare plc

Preliminary Results

Mothercare plc, today announces its preliminary results for the 52 weeks ended 29 March 2008.

Strategic Highlights

• Record year with strong growth in underlying sales, profits and dividend

• Successful acquisition and integration of the Early Learning Centre ('ELC'); benefits greater and earlier than expected

• Multi-channel strategy delivering growth

• International expansion continues with more than 500 overseas stores in 48 countries today

• Strategic reshaping of UK property portfolio underway. 80 ELC inserts trading in Mothercare stores by Christmas. New out of town refit rolling out. Extensive reorganisation of the combined estate to create destination out of town parenting centres

• Enlarged and transformed business poised for a new phase of growth

Financial Results

	Results	% change
Group sales	£676.8m	+35.8%
Group underlying profit before tax(1)	£38.6m	+70.8%
Group profit before tax	£4.5m	-76.2%
Underlying EPS	34.5p	+42.6%
Basic EPS	0.1p	-99.5%
Total dividend	12.0p	+20.0%

Group profit before tax includes one-off exceptional charges totalling £35.1m relating to the integration of ELC and the resulting property portfolio restructure.

Financial Highlights (proforma basis)(2)

• Group sales up 3.6% to £703.6m; UK like-for-like sales up 2.9%(3)

• UK gross margin up 70 basis points

• Direct in Home sales up 19.7% to £49.9m; Direct in Store sales up 43.5% to £35.6m

• International franchisee retail sales up 27.5% to £286.8m; franchisee like-for-like sales up 12.0%(3)

• Group underlying profit before tax up 42.9% to £33.0m(1); UK up 29.2%, International up 20.5%

• Strong cash generation; year end cash balance £22.7m

Ben Gordon, Chief Executive said: 

'This has been a transformational year for the Mothercare group. The acquisition of the Early Learning Centre this year was a major step in achieving our ambitions to establish Mothercare as the world's leading specialist parenting group. In the multi-channel UK business we grew like-for-like sales and margins and tightly controlled costs, leading to a significant increase in underlying profitability.

'International continues to grow rapidly, further strengthened by the addition of the Early Learning Centre brand, with more than 500 overseas franchise stores operating today across both brands.

'Although there is some caution about the UK consumer environment, we are well placed as we enter the new financial year. Our prospects for growth are driven by further benefits from the acquisition of the Early Learning Centre, international expansion opportunities, strong momentum in our Direct business and the reshaping of the combined UK property portfolio.'

Enquiries to:

  Mothercare plc

Ben Gordon, Chief Executive	01923 206001
Neil Harrington, Finance Director	01923 206187
Brunswick Group Limited
Catherine Hicks/Anna Jones	020 7404 5959

(1)   Group underlying profit before taxation excludes one-off exceptional items (relating to the acquisition of ELC and the

        resulting property portfolio restructure), amortisation of acquired intangible assets and the non-cash IAS 39 adjustment

       (marking to market of financial instruments). See Financial Review for further details.

(2)    On 19 June 2007, Mothercare completed the acquisition of ELC and these results include ELC from the date of 

        acquisition. For ease of analysis, certain figures are additionally presented on an unaudited 'proforma' basis, which 

        assumes that ELC had been owned for all of this year and all of last year (see Financial Review).

(3)    See Financial Review for definition of like-for-like sales.

CHIEF EXECUTIVE'S REVIEW

RESULTS

The last year has been transformational for the Mothercare group. We have delivered strong growth in sales, margins and underlying profits in both our UK and International businesses. At the same time we made the strategically important acquisition of the Early Learning Centre which provides the platform for the Mothercare group to enter a new growth phase. We are successfully integrating the business and now expect to achieve synergy benefits greater than originally expected and earlier than our initial plans. In addition our multi-channel strategy continues to deliver, with rapid growth in Direct sales and the extensive property portfolio restructure already underway provides the platform for further profit growth in the UK. Our International business goes from strength to strength with over 500 overseas stores in 48 countries operating today.

The acquisition of the Early Learning Centre was completed on 19 June 2007. The Early Learning Centre is a seasonal business and makes all of its profits in the second half of the year, traditionally incurring losses in the first half. As a result, the Early Learning Centre incurred £4.1 million of pre-acquisition losses from retail operations between 1 April 2007 and 19 June 2007. On a statutory basis, these pre-acquisition losses are not included in the results of the enlarged group for this financial year.

The financial statements and this review have been prepared on a statutory basis. The Financial Review contains certain information prepared on a more comparable 'proforma' basis which assumes that the Early Learning Centre had been owned for all of this financial year and also all of last financial year.

Group sales for the year rose by 35.8% to £676.8 million (2007: £498.5 million). Group underlying profit before taxation increased by 70.8% to £38.6 million (2007: £22.6 million).

Group underlying profit before taxation excludes one-off exceptional charges of £35.2 million (2007: £2.4 million) mostly relating to the integration of the Early Learning Centre and the resulting restructure of the enlarged group property portfolio previously announced. Group underlying profit before taxation also excludes the new amortisation charge on intangible assets acquired and also the non-cash IAS 39 adjustment. Including these items, statutory group profit before taxation decreased by 76.2% to £4.5 million (2007: £18.9 million).

The group has performed strongly during the year. In the UK, like-for-like sales increased by 2.9%. This was augmented by an increase in the group's UK gross margin of 70 basis points. Costs have also been tightly controlled and this has led to an increase in underlying profits in the UK.

Our International business continues to go from strength to strength with franchisee like-for-like sales up 12.0%. During the year we opened 77 overseas franchise stores taking the total to 494 at year end. As a result, International sales grew by 28.4% to £111.8 million.

The business is highly cash generative and after spending £42.0 million on the purchase of the Early Learning Centre business during the year, the year-end cash balance remains positive at £22.7 million (2007: £40.1 million). As a result of the strong underlying performance of the group and the positive cash generation, we are pleased to recommend the final dividend of 8.3 pence, an increase of 23.9%. The full year dividend of 12.0 pence is an increase of 20.0%.

BRAND DEVELOPMENT

We continue to work on building Mothercare into the world's leading specialist retailer of parenting and children's products. The acquisition of the Early Learning Centre in the year was a key step in the development of this position.

Product

We are developing innovative and exciting own-brand products under both the Mothercare and Early Learning Centre brands.

During the year we launched the award-winning Mothercare My3 travel system that is competing very successfully at the premium end of the market. Mothercare also launched a new own-brand Buggster pushchair range and a new range of premium branded car seats during the year. In the Autumn, Mothercare launched the Mothercare 'Smart Nappy', a new more environmentally-friendly nappy product which has the functionality to be disposable or re-usable and is exclusive to Mothercare. In September we will be launching a new premium clothing range in association with celebrity and new mother Myleene Klass.

The Early Learning Centre is a brand that resonates around the world and is proving highly complementary to the Mothercare brand and product mix. More than 80% of Early Learning Centre products are own-brand and we are working hard to continue to accelerate the innovation and creativity of the toys we are producing in our state of the art product development centre in Hong Kong.

Examples of our own brand product include the Lift-Off Rocket which has been hugely successful both in the UK and overseas and has been shortlisted this year for the prestigious Toy Industry Association Awards in New York. Our focus on specialism was rewarded at the 2008 Retail Week awards where Mothercare won the Specialist Retailer of the Year award. 

Service and People

One of the key differentiators in our stores is the best in class expertise and specialism of our staff. Our independent Mystery Shopper programme continues to drive better service in our stores and has recognised our improvements in this area, ranking us very favourably in comparison with our major competitors.

We were again this year included in the Top 20 Best Big Companies in the 2008 Sunday Times Best Places to Work Awards.

GROWTH STRATEGY

The business is now poised to enter a new growth phase. The growth strategy of the Mothercare group is focused on four key levers that will allow us to maximise the potential of the Mothercare and Early Learning Centre brands. These are:

1.    maximising the synergies from the integration of the Early Learning Centre;

2.    restructuring the combined Mothercare and Early Learning Centre property portfolio;

3.    continuing the rapid growth of Direct; and

4.    driving the international reach of the Mothercare and Early Learning Centre brands.

1.    Early Learning Centre Integration Synergies

The largest single synergy from the acquisition of the Early Learning Centre is the optimisation of the combined UK store portfolio. A significant element of this is the insertion of the Early Learning Centre into key Mothercare out of town stores and larger high street stores. We tested 21 inserts over the Christmas period in various configurations, to understand what would work best for our customers. These tests were successful with the inserts exceeding our expectations.

As a result, we took the decision to roll out Early Learning Centre inserts to all remaining Mothercare out of town stores and selected high street stores and we will have 80 Early Learning Centre inserts trading in Mothercare stores by Christmas 2008.

The second integration synergy is to develop the Early Learning Centre brand internationally. We are well advanced in developing the brand overseas, and we have been able to accelerate this using Mothercare's existing franchisee networks. During the year we opened 26 Early Learning Centre stores overseas.

The third synergy from the acquisition is around margin growth and sourcing. Through the acquisition of the Early Learning Centre we acquired a state of the art sourcing office based in Hong Kong and we have already invested in this facility, which is now responsible for directly sourcing all of the group's toys.

The fourth synergy is the integration of the multi-channel operations across the two brands. We are now in the process of optimising databases and using Mothercare Direct expertise to begin to enhance the Early Learning Centre Direct in Home and Direct in Store offering.

We have made good progress on our fifth integration synergy, which is realising cost synergies from the acquisition of the Early Learning Centre. There have been significant savings through combining the two management teams and joint procurement. We have also fully integrated our back office functions including Finance, Information Technology, Property and Human Resources. Further efficiencies will come when we move the Early Learning Centre warehouse from Swindon to a new site adjacent to the existing Mothercare warehouse in Daventry in June this year.

The integration of the Early Learning Centre is ahead of schedule and will yield greater synergies than originally envisaged. We estimate that synergy benefits arising from the acquisition will be at least £10.0 million in the second full financial year following the acquisition, 2009/10. This is £2.0 million more than we estimated at the time of acquisition. Benefits are also being realised earlier than anticipated and we expect to achieve benefits of at least £6.0 million in the current financial year, 2008/09, which is double our previous estimate.

One-off exceptional costs associated with the integration have been recognised in cost of sales and administrative expenses as appropriate. These include the costs of moving the Early Learning Centre distribution centre from Swindon to the Mothercare site in Daventry, the opening of Early Learning Centre inserts in Mothercare stores, the restructure of the Early Learning Centre's offices in London and Swindon, the realignment of international franchise agreements and the integration programme.

2.    Property Portfolio

The second Mothercare growth lever is the strategic restructure of the combined property portfolio.

Inserting Early Learning Centre stores within Mothercare on its own helps us to rightsize the Mothercare chain. The acquisition of the Early Learning Centre has also given us a significant opportunity to integrate and optimise the combined property portfolios, taking the best sites from both brands, and we are in the process of implementing a major restructure of the combined store portfolio which we announced at the time of the acquisition. 

We have also been rightsizing the Mothercare store portfolio through resiting (closing a store and opening a smaller store in the same town) and downsizing (making an existing store smaller) to drive sales per square foot. This strategy has been successful in reducing operating costs, particularly rent, whilst retaining the vast majority of sales. We have now carried out ten rightsizes in Mothercare and the economics are compelling. We have now accelerated the rightsizing programme.

We have now refurbished 16 of our out of town stores with our new Mothercare format and all are performing well. The larger stores now contain Mothercare Home & Travel, Mothercare Clothing, Early Learning Centre Toys, Clarks Shoes and a Photo Shop, creating a true parenting destination. We now plan to roll out this format to a total of 40 stores by Spring next year.

We are also in the process of optimising our high street portfolio by consolidating the two brands into one store where we have both a Mothercare and an Early Learning Centre on the same high street or nearby, creating a more profitable store with two brands in the one location.

Whilst the timing of property activity is to some degree uncertain, we expect all of this activity to be completed by the end of 2009. The result of all this work will be a transformed group store portfolio in the UK which is more focussed towards out of town parenting centres

The exceptional costs of this exercise have been recognised as appropriate in cost of sales, administration expenses or loss on disposal of property interests. We estimate annualised benefits from this property restructure to amount to £5.0 million including depreciation and we anticipate these will start to impact the income statement in 2009/10.

3.    Growth of Direct

The Direct business through both Direct in Home and Direct in Store has been rapid in recent years and total Direct sales amount to £85.5 million this year, a growth of 78.9%.

We are constantly increasing our online ranges and now have over 400 types of pushchair available online and 150 car seats online, easily the largest selection available in the UK. We are now expanding the clothing ranges and other parts of Home & Travel available online, further increasing choice for our customers. We are also considering ways of extending the success of our Direct business into our international markets.

A key driver of Mothercare Direct growth in recent years has been our web-enabled store strategy, where every Mothercare till has the capability to order anything available online on our website, for delivery to the home.

The entire Early Learning Centre range is already available online and the focus for the coming year will be to optimise the Early Learning Centre website and improve its performance. We will also be looking to bring web-in-store to the Early Learning Centre store network in the coming year.

Another success has been the launch of Gurgle.com, our social networking and information site for parents. This site now has over 45,000 registered users.

4.    International

The fourth lever in our growth strategy is the globalisation of our two brands. International has continued to grow rapidly this year with overall franchisee sales up 42.2% and underlying like-for-like sales up 12.0%. During the year, 77 new franchise stores were opened (51 Mothercare and 26 Early Learning Centre), bringing the total to 494 stores at the year end outside the UK (379 Mothercare and 115 Early Learning Centre). Mothercare and the Early Learning Centre are now present in 48 countries outside the UK.

We will continue to build the International business through growing like-for-like sales, opening new stores in existing countries and opening new stores in new countries. Last month we opened our 50th store in Saudi Arabia and plan to expand significantly our presence in Turkey and Russia where we currently have 30 and 25 stores respectively.

In India, where we have plans to open 100 stores, we have already opened 20 stores in the last two years in eight cities and the performance has exceeded our expectations. We also recently announced our first international joint venture operation, in China, where we expect to open our first two stores in this important market imminently.

With the Early Learning Centre there is an opportunity to grow rapidly the brand's global presence through leveraging the existing Mothercare franchisee network, and we are working with our franchisee partners to develop plans for the Early Learning Centre in the countries in which Mothercare trades, but the Early Learning Centre does not.

We plan to open at least 100 new overseas stores this year across the enlarged group.

SUMMARY AND OUTLOOK

This has been a transformational year for the Mothercare group. The acquisition of the Early Learning Centre this year was a major step in achieving our ambitions to establish Mothercare as the world's leading specialist parenting group. In the multi-channel UK business we grew like-for-like sales and margins and tightly controlled costs, leading to a significant increase in underlying profitability.

International continues to grow rapidly, further strengthened by the addition of the Early Learning Centre brand, with more than 500 overseas franchise stores operating today across both brands.

Although there is some caution about the UK consumer environment, we are well placed as we enter the new financial year with prospects for growth driven by further synergy benefits from the acquisition of the Early Learning Centre, international expansion opportunities, strong momentum in our Direct business and the reshaping of the UK property portfolio.

FINANCIAL REVIEW

ACQUISITION

Mothercare completed the acquisition of the Early Learning Centre on 19 June 2007. Details of the acquisition are set out in note 9.

Group sales for the year rose by 35.8% to £676.8 million (2007: £498.5 million). Group underlying profit before taxation increased by 70.8% to £38.6 million (2007: £22.6 million). Group profit before tax was £4.5 million (2007: £18.9 million).

The Early Learning Centre is a seasonal business and makes all of its profits in the second half of the year, traditionally incurring losses in the first half. As a result, the Early Learning Centre incurred £4.1 million of pre-acquisition losses from retail operations between 1 April 2007 and 19 June 2007. On a statutory basis, these pre-acquisition sales and losses are not included in the results of the enlarged group for this financial year.

The results on a statutory basis therefore do not reflect the ongoing performance of the group, so the Results Summary that follows is prepared on an unaudited 'proforma' basis which assumes that the Early Learning Centre had been owned for the entire financial year 2007/08 and also for the entire financial year 2006/07. Profit from retail operations calculated on a statutory basis is £4.1 million higher than if calculated on a proforma basis.

RESULTS SUMMARY

On a proforma basis, total group sales increased by 3.6% to £703.6 million and group underlying profit before tax increased by 42.9% to £33.0 million. Proforma underlying profit excludes exceptional items, amortisation of intangible assets (excluding software) and the volatile non-cash IAS 39 adjustment. If these items are included, proforma group profit before taxation reduces from a profit of £15.5 million last year to a loss of £2.6 million this year.

Income Statement - Proforma Basis

	07/08 £m	06/07 £m
Revenue	703.6	679.0	+3.6%
Profit from retail operations	34.4	25.1	+37.1%
Financing	(1.4)	(2.0)	-30.0%
Underlying profit before tax	33.0	23.1	+42.9%
Integration costs *	(18.8)	-
Property restructure *	(16.9)	(0.8)
Other re-organisation costs *	(0.4)	(2.6)
IAS 39 adjustment	2.5	(1.3)
Amortisation of intangible assets	(2.0)	(2.9)
(Loss)/profit before tax	(2.6)	15.5	-116.8%
Underlying EPS	28.5p	20.6p	+38.3%

* Exceptional items

Results by Segment - Proforma Basis

The results of the Early Learning Centre have been included in the primary segments of Mothercare plc, which continue to be the UK business (including Direct) and the International business.

We are pleased with the strong UK performance, given the difficult trading environment, with total sales up 1.6% and profits up 29.2%. International growth continues strongly with profits up 20.5%.

The UK like-for-like sales growth of 2.9%, the 70 basis point improvement in UK gross margin, tight cost control and strong growth of Direct in Home and International, have all contributed to this strong full year performance.

Like-for-like sales are defined as sales growth on the previous year for stores that have been trading continuously from the same selling space for at least a year and are presented on a 'comparable' basis, which assumes that the Early Learning Centre had been owned for the same period in the prior year. The sales from Early Learning Centre inserts in Mothercare stores are included in like-for-like sales where they are trading on existing Mothercare space. Franchisee like-for-like sales and franchisee retail sales are estimated.

£ million	Revenue 07/08	Revenue 06/07	%
UK	587.3	578.2	+1.6%
International	116.3	100.8	+15.4%
	703.6	679.0	+3.6%
£ million	Underlying profit 07/08	Underlying profit 06/07	%
UK	34.5	26.7	+29.2%
International	9.4	7.8	+20.5%
Corporate	(9.5)	(9.4)	+1.1%
Financing	(1.4)	(2.0)	-30.0%
	33.0	23.1	+42.9%

In the first half, we analysed underlying profit between Mothercare and the Early Learning Centre, however, as we said at the time, we are no longer able to accurately report these separately going forward due to the rapid integration of the two businesses.

Non-Underlying Items

Underlying profit before taxation on a proforma basis excludes £35.6 million of non-underlying items, of which £35.7 million relates to the integration of the Early Learning Centre and the resulting property restructure of both businesses. Non-underlying items also include the non-cash IAS 39 credit of £2.5 million and a charge of £2.0 million relating to the amortisation of identifiable intangible assets arising on the acquisition.

i.    Integration Costs

The integration of the Early Learning Centre is ahead of schedule. Our latest estimate is that synergy benefits arising from the acquisition will be at least £10.0 million in 2009/10, the second full financial year following the acquisition.

Benefits are also being realised earlier than anticipated. In 2007/08, we achieved an estimated £2.0 million of synergy benefits and in 2008/09 we expect to achieve approximately £6.0 million, both double our previous estimate. We are in the process of moving the Early Learning Centre distribution centre from Swindon to the Mothercare site in Daventry, realising operational and transport cost benefits.

We expect the total exceptional costs relating to the integration of the two businesses to be £18.8 million, excluding the loss on the disposal of property interests relating to the combined UK store portfolio optimisation. £5.2 million of this expenditure has been incurred in the financial year and £13.6 million included in a provision.

These costs have been recognised in cost of sales and administrative expenses as appropriate and relate to the roll out of Early Learning Centre inserts in Mothercare stores, the closure of the Early Learning Centre London office, the restructuring of the Early Learning Centre Swindon head office, the integration of all shared functions (including redundancy costs), the move of the Early Learning Centre distribution centre from Swindon to Daventry, the realignment of International franchisee agreements and project management and consulting costs.

ii.    Property Restructure

We have been successful in rightsizing certain Mothercare stores and have been able to reduce the size of these stores and their operating costs whilst retaining the vast majority of sales. We have now carried out ten rightsizes in Mothercare and the economics have been highly beneficial.

Inserting Early Learning Centre stores into Mothercare stores on its own helps us to rightsize the Mothercare chain, however the acquisition of the Early Learning Centre has also given us significant opportunity to integrate and optimise the combined property portfolio by:

• Rolling out the new out of town refit format to a total of 40 out of town stores;

• Closing low contribution stores by consolidating both brands into one store in a town;

• Accelerating the existing Mothercare rightsizing programme; and

• Shifting the focus of our store chain from in town to out of town.

We are planning in total 18 out of town openings, 63 in town closures and 9 downsizes to be completed by the end of 2009. This includes 15 resites which involves 15 openings and 15 closures:

	Out of town openings		In town closures		Downsize		Total stores affected
Rightsizing
- Resites	15		15		-		30
- Downsizes	-		-		9		9
2 into 1	-		17		-		17
Closures	-		31		-		31
New stores	3		-		-		3
	18		63		9		90
New ELC inserts							40
New OOT refits							15
							145

In total, including those stores that will receive an Early Learning Centre insert or a new out of town refit, 145 stores will be affected by the property restructure. There is an additional 50-store pipeline at early stages of planning not included in these numbers.

The restructuring activity has commenced and already half of the 90 stores included in the programme have reached the stage of legal commitment and Early Learning Centre inserts have been rolled out to 40 stores today. The restructuring activity is helped by the shape of the Early Learning Centre lease portfolio where approximately half of the store leases are due for a break or renewal in the next two to three years.

In total, the exceptional costs recognised in loss on disposal of property interests associated with the closure and resiting of Mothercare and ELC stores, are expected to be £16.3 million. Of this, £8.3 million is a cash cost and £8.0 million is a non-cash cost. In addition, we expect to spend £15.0 million cash capital expenditure costs in the next two years. Total cash costs therefore amount to £23.3 million over two years and it is expected that this will be funded from operating cash flow.

We estimate the additional annual pre-tax profits from this property restructure to amount to £5.0 million per annum (£6.0 million cash) and these benefits are expected to be realised during the financial year 2009/10.

Investment Income, Finance Costs and Taxation

Investment income represents interest receivable on bank deposits. Finance costs represent interest payable on bank loans and overdrafts including fees and the unwinding of discounts on provisions.

The tax charge is comprised of current and deferred tax and is calculated at 30% (2006/07: 30%). The group expects to utilise all of its brought forward tax losses in 2007/08 and therefore no deferred tax asset has been carried forward in respect of such losses (2006/07: £3.9 million).

The tax charge is higher than the standard rate of corporation tax due to estimates of the property and integration expenditure that may not be allowable for tax purposes.

Pensions

We continue to operate defined benefit pension schemes for our staff. Full details of the income statement net charge, total cash funding and net asset at 29 March 2008 are as follows:

	07/08 £ million		06/07 £ million
Income statement
Service cost	(3.8)		(5.0)
Return on assets	13.9		13.2
Interest on liabilities	(10.2)		(9.4)
Net charge	(0.1)		(1.2)
Cash funding
Regular contributions	(2.2)		(3.0)
Additional contributions	(1.5)		(1.5)
Total cash funding	(3.7)		(4.5)
Balance Sheet
Fair value of schemes' assets	181.1		193.6
Present value of defined benefit obligations	(167.3)		(191.6)
Unrecognised surplus	(11.8)		-
Net asset	2.0		2.0

The valuation of the schemes under IAS 19 at 29 March 2008 gave rise to a net pension surplus of £13.8 million (2007: £2.0 million) before deferred taxation. However the markets, and in particular the corporate bond yields that we are required to use under IAS 19 to value the defined benefit obligations, are volatile at present and in addition, we are awaiting the three-year valuation as at 31 March 2008 and holding discussions with the Trustees in this regard. We have therefore taken a prudent approach and have decided not to recognise the increase in the pension fund net asset arising in the year.

Balance Sheet and Cash Flow

The balance sheet now includes identifiable intangible assets arising on the acquisition of £28.9 million and goodwill of £68.6 million, and the group's net cash position at the year end is positive, at £22.7 million.

The group's strong cash generation is a real highlight, with a net inflow in the year of £24.6 million, before the acquisition cash outflow of £42.0 million. The group generated operating cash flow of £51.8 million, including an inflow from working capital of £8.5 million. Property receipts were £4.5 million. The inflow from working capital has been generated from tight control of UK stock levels and trade creditors and benefits arising from the acquisition of the Early Learning Centre.

Capital Expenditure

Capital expenditure of the group in the year was £20.4 million (2006/07: £18.5 million) of which £15.1 million was invested in the store network. Including the capital expenditure relating to the integration, we expect to spend £30.0 million in 2008/09, of which £22.0 million will be invested in the store network.

Earnings per Share and Dividend

Basic underlying earnings per share on a proforma basis were 28.5 pence compared to 20.6 pence last year. The Directors are pleased to recommend a 23.9% increase in final dividend to 8.3 pence (2006/07: 6.7 pence). The total dividend for the year is 12.0p (2007: 10.0p), an increase of 20.0%.

The final dividend will be payable on 8 August 2008 to shareholders registered on 6 June 2008. The latest date for election to join the dividend reinvestment plan is 18 July 2008.

Consolidated income statement

For the 52 weeks ended 29 March 2008

	Note	52 weeks ended 29 March 2008			52 weeks ended 31 March 2007
		Underlying1	Non-underlying 2	Total	Underlying1	Non-underlying 2	Total
		£ million	£ million	£ million	£ million	£ million	£ million
Revenue	2	676.8	-	676.8	498.5	-	498.5
Cost of sales	3	(602.1)	(10.4)	(612.5)	(448.8)	(1.8)	(450.6)
Gross profit		74.7	(10.4)	64.3	49.7	(1.8)	47.9
Administrative expenses	3	(36.1)	(7.3)	(43.4)	(28.7)	(2.1)	(30.8)
Profit from retail operations		38.6	(17.7)	20.9	21.0	(3.9)	17.1
(Loss)/profit on disposal of property interests	3	-	(16.3)	(16.3)	-	0.2	0.2
Share of results of joint ventures		(0.1)	(0.1)	(0.2)	-	-	-
Profit from operations		38.5	(34.1)	4.4	21.0	(3.7)	17.3
Investment income	4	1.6	-	1.6	1.7	-	1.7
Finance costs	5	(1.5)	-	(1.5)	(0.1)	-	(0.1)
Profit before taxation		38.6	(34.1)	4.5	22.6	(3.7)	18.9
Taxation	6	(10.8)	6.4	(4.4)	(5.8)	1.4	(4.4)
Profit for the period attributable to  equity holders of the parent		27.8	(27.7)	0.1	16.8	(2.3)	14.5
Earnings per share
Basic	8	34.5p	(34.4)p	0.1p	24.2p	(3.3)p	20.9p
Diluted	8	33.7p	(33.6)p	0.1p	23.7p	(3.2)p	20.5p

All results relate to continuing operations.

1 Before items described in note 2 below.

2 Includes exceptional items (loss/profit on disposal of property interests, integration costs, restructuring and reorganisation of Direct distribution), amortisation of intangible assets (excluding software) and the impact of fair value accounting under IAS 39 as set out in note 3 to the financial statements.

Consolidated statement of recognised income and expense

For the 52 weeks ended 29 March 2008

	52 weeks ended  29 March 2008	52 weeks ended  31 March 2007
	£ million	£ million
Actuarial (loss)/gain on defined benefit pension schemes	(3.6)	16.1
Tax on items taken directly to equity	1.0	(4.7)
Net (loss)/income recognised directly in equity	(2.6)	11.4
Profit for the period	0.1	14.5
Total recognised income and expense for the period attributable to equity holders of the parent	(2.5)	25.9

Consolidated balance sheet

As at 29 March 2008

	Note		29 March 2008	31 March 2007
			£ million	£ million
Non-current assets
Goodwill			68.6	-
Intangible assets			35.6	5.2
Property, plant and equipment			95.8	85.4
Investments in joint ventures			0.8	-
Deferred tax asset			-	0.2
Retirement benefit obligations			2.0	2.0
			202.8	92.8
Current assets
Inventories			70.8	51.8
Trade and other receivables			53.2	42.3
Current tax assets			0.6	-
Cash and cash equivalents			22.7	40.1
			147.3	134.2
Total assets			350.1	227.0
Current liabilities
Trade and other payables			(95.6)	(57.6)
Current tax liabilities			-	(0.2)
Obligations under finance leases			(0.4)	-
Short term provisions			(24.0)	(2.9)
			(120.0)	(60.7)
Non-current liabilities
Trade and other payables			(15.5)	(14.8)
Obligations under finance leases			(0.1)	-
Deferred tax liability			(4.4)	-
Long term provisions			(12.1)	(0.5)
			(32.1)	(15.3)
Total liabilities			(152.1)	(76.0)
Net assets			198.0	151.0
Equity attributable to equity holders of the parent
Called up share capital			43.6	36.6
Share premium account			3.4	3.1
Other reserve			50.8	-
Own shares			(9.8)	(7.4)
Retained earnings			110.0	118.7
Total equity	10		198.0	151.0

Approved by the board and authorised for issue on 22 May 2008 and signed on its behalf by:

Ben Gordon

Neil Harrington

Consolidated cash flow statement

For the 52 weeks ended 29 March 2008

	Note	52 weeks ended 29 March 2008	52 weeks ended 31 March 2007
		£ million	£ million
Net cash flow from operating activities	11	51.8	27.5
Cash flows from investing activities
Interest received		1.6	1.6
Purchase of property, plant and equipment		(17.3)	(16.0)
Purchase of intangibles - software		(3.1)	(2.5)
Proceeds from property, plant and equipment		4.5	1.4
Acquisition of subsidiary	9	(36.4)	-
Cost of acquisition	9	(5.6)	-
Investments in joint ventures		(1.0)	-
Net cash used in investing activities		(57.3)	(15.5)
Cash flows from financing activities
Interest paid		(1.1)	(0.1)
Repayment of obligations under finance leases		(0.5)	-
Equity dividends paid		(7.9)	(6.6)
Issue of ordinary share capital		0.1	1.2
Purchase of own shares		(2.5)	(2.3)
Net cash used in financing activities		(11.9)	(7.8)
Net (decrease)/increase in cash and cash equivalents		(17.4)	4.2
Cash and cash equivalents at beginning of period		40.1	35.9
Cash and cash equivalents at end of period		22.7	40.1

Notes

1.    General information

  a.      The accounting policies followed are the same as those published by the group within   

           the 2007 annual report and accounts, except for the adoption of IFRS 7 'Financial  

           Instruments: Recognition and Measurement' during the year and new accounting olicies

           relating to the acquisition of ELC and investments in joint ventures as follows:

                
            Business combinations

The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 'Business combinations' are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 'Non-Current Assets Held for Sale and Discontinued Operations', which are recognised and measured at fair value less costs to sell.

Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in the income statement. 

Amortisation of intangible assets
As a result of the acquisition of the Early Learning Centre the balance sheet now  

        includes additional identifiable intangible assets. The average estimated useful life of

        the assets is as follows:

Trade name                   - 20 years

Customer relationships    - 5 to 10 years

The amortisation of these intangible assets does not reflect the underlying performance of the business.

Joint ventures 

Joint ventures are accounted for using the equity method whereby the interest in the joint venture is initially recorded at cost and adjusted thereafter for the post acquisition change in the group's share of net assets. The profit or loss of the group includes the group's share of the profit or loss of the joint venture.

   b.      Whilst the financial information included in this preliminary announcement has been

            prepared in accordance with IFRS as endorsed by the European Union, this  

            announcement does not itself contain sufficient information to comply with all the

            disclosure requirements of IFRS.

   c.       The Company believes that underlying profit before tax and underlying earnings

            provides additional useful information for shareholders. The term underlying earnings

            is not a defined term under IFRS and may not therefore be comparable with similarly

            titled profit measurements reported by other companies. It is not intended to be a

            substitute for, or superior to, IFRS measures of profit. As the Company has chosen to

            present an alternative earnings per share measure, a reconciliation of this alternative  

            measure to the statutory measure required by IFRS is given in note 8. 

   d.      The financial information set out in this announcement does not constitute the

           Company's statutory accounts for the 52 week period ended 29 March 2008 or the 52

           week period ended 31 March 2007, but it is derived from those accounts. Statutory

           accounts for 2007 have been delivered to the Registrar of Companies and those for

           2008 will be delivered following the Company's annual general meeting. The auditors

           have reported on those accounts; their reports were unqualified and did not contain

           statements under s237 (2) or (3) Companies Act 1985.

2.    Segmental information

For management purposes, the group is currently organised into two operating segments:  UK and International.  UK comprises the UK store and wholesale operations, catalogue and web sales. The International business comprises the group's franchise and wholesale operations outside of the UK. These two segments are distinguished by the different nature of their risks and returns. It is considered that there are no secondary segments as all business originates in the UK.

Segmental information about the UK and International businesses is presented below.

		52 weeks ended 29 March 2008
		UK	International	Unallocated corporate expenses	Consolidated
		£ million	£ million	£ million	£ million
Revenue
External sales		565.0	111.8	-	676.8
Result
Segment result (underlying)		38.0	9.6	(9.1)	38.5
IAS 39 adjustment		2.7	-	-	2.7
Amortisation of intangibles		(1.6)	-	-	(1.6)
Exceptional items (note 3)		(35.2)	-	-	(35.2)
Profit from operations		3.9	9.6	(9.1)	4.4
Investment income					1.6
Finance costs					(1.5)
Profit before taxation					4.5
Taxation					(4.4)
Profit for the period					0.1

		52 weeks ended 31 March 2007
		UK	International	Unallocated corporate expenses	Consolidated
		£ million	£ million	£ million	£ million
Revenue
External sales		411.4	87.1	-	498.5
Result
Segment result (underlying)		19.3	8.1	(6.4)	21.0
IAS 39 adjustment		(1.3)	-	-	(1.3)
Exceptional items (note 3)		(2.4)	-	-	(2.4)
Profit from operations		15.6	8.1	(6.4)	17.3
Investment income					1.7
Finance costs					(0.1)
Profit before taxation					18.9
Taxation					(4.4)
Profit for the period					14.5

Corporate expenses not allocated to UK or International represent head office costs, board and senior management costs, insurance, annual and interim reporting costs and audit and professional fees.

3.    Exceptional and other non-underlying items

Due to their significance and one-off nature, certain items have been classified as exceptional or non-underlying as follows:

			52 weeks ended 29 March 2008	52 weeks ended 31 March 2007
			£ million	£ million
Exceptional items:
	(Loss)/profit on disposal of property interests		(16.3)	0.2
	Integration of ELC included in cost of sales		(11.5)	-
	Integration of ELC included in admin expenses		(7.3)	-
	UK central and sourcing restructure		(0.1)	(2.1)
	Reorganisation of Direct distribution centre		-	(0.5)
Other non-underlying items:
	IAS 39		2.7	(1.3)
	Amortisation of intangibles		(1.6)	-
Exceptional and other non-underlying items			(34.1)	(3.7)

(Loss)/profit on disposal of property interests

During the 52 weeks ended 29 March 2008 ('current year'), a net charge of £16.3 million has been recognised in profit from operations relating to the optimisation of the UK portfolio which involves the closure and resiting of Mothercare and ELC stores.

During the 52 weeks ended 31 March 2007 ('prior year'), a net credit of £0.2 million was recognised in profit from operations relating to the disposal of freehold and leasehold property interests in closed stores.  

The tax effect of the loss on disposal of property interests in the current year was a credit of £0.8 million. The tax effect of the profit on disposal of property interests in the prior year was a credit of £0.3 million. 

Integration of the Early Learning Centre

In the current year, costs of £11.5 million (2007: £nil) were charged to cost of sales relating to the restructure of the Early Learning Centre's supply chain and the opening of ELC inserts in Mothercare stores.

In the current year, costs of £7.3 million (2007: £nil) were charged to administrative expenses relating to the restructure of the Early Learning Centre's head offices in Swindon and London, the realignment of international franchise agreements and the integration programme.

The tax effect of the above costs in the current year was a credit of £5.3 million.

UK central and sourcing restructure

In the current year, costs of £0.1 million (2007: £2.1 million) were charged to administrative expenses relating to a restructure of the UK head office in Watford and the closure of the group's sourcing facility in Manchester, the expansion of the sourcing office in India and the opening of a new sourcing office in China. The tax effect of this charge to gross profit was £nil (2007: £0.6 million).

Reorganisation of Direct distribution centre

In the prior year, costs of £0.5 million were charged to gross profit to provide for the direct revenue costs associated with the reorganisation of distribution as a result of the move to a new Direct distribution centre. The tax effect of this charge to gross profit was a credit of £0.1 million.

IAS 39

In the current year, a net profit of £2.7 million (2007: net loss of £1.3 million) was recognised in cost of sales as a result of the Company's decision not to adopt hedge accounting under IAS 39.

Amortisation of intangibles

Amortisation of intangibles arising on the acquisition of the Early Learning Centre of £1.6 million (2007: £nil) was charged to cost of sales.

4.    Investment income

	52 weeks ended 29 March 2008	52 weeks ended 31 March 2007
	£ million	£ million
Interest on bank deposits	1.6	1.7
Investment income	1.6	1.7

5.    Finance costs

	52 weeks ended 29 March 2008	52 weeks ended 31 March 2007
	£ million	£ million
Interest on bank loans and overdrafts	1.1	0.1
Unwinding of discounts on provisions	0.4	-
Finance costs	1.5	0.1

Notes (continued)

6.    Taxation

The charge for taxation on profit for the period comprises:

	52 weeks ended 29 March 2008	52 weeks ended 31 March 2007
	£ million	£ million
Current tax:
Current year	3.9	0.6
Adjustment in respect of prior periods	0.1	-
	4.0	0.6
Deferred tax:
Current year	2.0	5.4
Adjustment in respect of prior periods	(1.6)	(1.6)
	0.4	3.8
Charge for taxation on profit for the period	4.4	4.4

UK corporation tax is calculated at 30 per cent (2007: 30 per cent) of the estimated assessable profit for the period.

At the balance sheet date, the group has unused tax losses of £nil (2007: £12.9 million) available for offset against future profits. A deferred tax asset of £nil (2007: £3.9 million) has been recognised in respect of such losses.

The charge for the period can be reconciled to the profit for the period before taxation per the consolidated income statement as follows:

	52 weeks ended 29 March 2008	52 weeks ended 31 March 2007
	£ million	£ million
Profit for the period before taxation	4.5	18.9
Profit for the period before taxation multiplied by the standard rate of corporation tax in the UK of 30% (2007: 30%)	1.4	5.6
Effects of:
Expenses not deductible for tax purposes	5.8	0.8
Impact of overseas tax rates	(0.2)	-
Change in tax rate	(0.2)	-
Utilisation of tax losses not previously recognised against capital gains	(0.9)	(0.4)
Adjustment in respect of prior periods	(1.5)	(1.6)
Charge for taxation on profit for the period	4.4	4.4

In addition to the amount charged to the income statement, deferred tax relating to share-based payment arrangements amounting to £nil (2007: £0.2 million) and deferred tax relating to retirement benefit obligations amounting to £1.0 million (2007: £4.9 million) have been credited directly to equity.

7.    Dividends

	52 weeks ended 29 March 2008	52 weeks ended 31 March 2007
	£ million	£ million
Amounts recognised as distributions to equity holders in the period
Final dividend for the 52 weeks ended 31 March 2007 of 6.70 pence per share (2007: final dividend for the 53 weeks ended 1 April 2006 of 6.15 pence per share)	4.7	4.3
Interim dividend for the 52 weeks ended 29 March 2008 of 3.70 pence per share (2007: interim dividend for the 52 weeks ended 31 March 2007 of 3.30 pence per share)	3.2	2.3
	7.9	6.6

The proposed final dividend of 8.3 pence per share for the 52 weeks ended 29 March 2008 was approved by the board after 29 March 2008, on 22 May 2008, and so, in line with the requirements of IAS 10 'Events After the Balance Sheet Date', the related cost of £7.3 million has not been included as a liability as at 29 March 2008. This dividend will be paid on 8 August 2008 to shareholders on the register on 6 June 2008.

8.    Earnings per share

		52 weeks ended 29 March 2008	52 weeks ended 31 March 2007
		million	million
Weighted average number of shares in issue		80.6	69.4
Dilution - option schemes		1.9	1.5
Diluted weighted average number of shares in issue		82.5	70.9
		£ million	£ million
Earnings for basic and diluted earnings per share		0.1	14.5
	Cost of accounting for derivatives (IAS 39)	(2.7)	1.3
	Amortisation of intangibles arising on acquisition of ELC	1.6	-
	Exceptional items (note 3)	35.2	2.4
	Tax effect of above items	(6.4)	(1.4)
Underlying earnings		27.8	16.8
		pence	pence
Basic earnings per share		0.1	20.9
Basic underlying earnings per share		34.5	24.2
Diluted earnings per share		0.1	20.5
Diluted underlying earnings per share		33.7	23.7

9.    Acquisition of subsidiary

On 19 June 2007, the group acquired 100 per cent of the issued share capital of Chelsea Stores Holdings Limited ('CSHL'). The CSHL group owns and operates the Early Learning Centre, a designer and retailer of toys and other children's products. 

The agreed consideration payable was in the form of the assumption of CSHL's estimated net debt on completion of £36.0 million, plus the issue of new Mothercare shares valued at that time at 361.45 pence per share or £49.0 million in total, which together gave an enterprise value of £85.0 million.

Since the announcement of the acquisition, the share price of Mothercare increased and the 13,809,494 Mothercare shares issued have been valued at completion at the mid-market closing quotation on 18 June 2007 of 420.00 pence (£58.0 million). This transaction has been accounted for by the purchase method of accounting.

			Book value	Fair value adjustments	Fair value
			£ million	£ million	£ million
Net assets acquired:
	Intangible assets		0.5	30.5	31.0
	Property, plant and equipment		12.8	-	12.8
	Inventories		14.3	1.4	15.7
	Trade and other receivables		8.9	(0.9)	8.0
	Trade and other payables		(27.1)	0.1	(27.0)
	Current tax assets		1.1	0.7	1.8
	Obligations under finance leases		(0.9)	-	(0.9)
	Provisions		(2.1)	(2.7)	(4.8)
	Deferred tax asset/(liability)		3.3	(8.5)	(5.2)
			10.8	20.6	31.4
Goodwill					68.6
Total cost of investment					100.0
Analysed as:
	Cash				36.4
	Share issue				58.0
	Total consideration				94.4
	Directly attributable costs				5.6
					100.0
Net cash outflow arising on acquisition:
	Cash consideration paid to date				39.5
	Cash and cash equivalents acquired				(3.1)
					36.4

The goodwill arising on the acquisition of CSHL of £68.6 million is attributable to the anticipated future operating synergies from the combination of the Mothercare and Early Learning Centre businesses, arising through optimising the enlarged UK store portfolio, international expansion, buying and sourcing margin benefits, leveraging Direct and cross-marketing opportunities, and cost efficiencies. The intangible assets arising of £30.5 million relate to the trade name, internet, wholesale and international customers.

The initial assessment of the purchase price allocation, as disclosed in the interim accounts, has been subsequently reviewed and adjustments have been made accordingly to goodwill, relating principally to the deferred tax liability.

CSHL contributed £156.1 million of revenue and a profit of £7.5 million to the group's reported profit for the period between the date of acquisition and 29 March 2008.

If the acquisition of CSHL had been completed on the first day of the current period, group revenues for the period would have been £703.6 million and reported group underlying profit would have been £33.0 million.

10.    Reconciliation of equity

	29 March 2008	31 March 2007
	£ million	£ million
Total recognised income and expense	(2.5)	25.9
Dividends to equity holders of the parent company	(7.9)	(6.6)
Issue of ordinary share capital	58.1	1.2
Purchase of own shares	(2.5)	(2.3)
Cost of employee share schemes	1.8	1.1
Net increase in equity	47.0	19.3
Equity at beginning of year	151.0	131.7
Equity at end of year	198.0	151.0

11.    Reconciliation of cash flow from operating activities

	52 weeks ended 29 March 2008	52 weeks ended 31 March 2007
	£ million	£ million
Profit from retail operations	20.9	17.1
Adjustments for:
Depreciation of property, plant and equipment	16.0	12.6
Amortisation of intangible assets - software	2.1	1.3
Amortisation of intangible assets - other	1.6	-
Losses on disposal of property, plant and equipment	1.7	0.2
(Gain)/loss on currency derivatives	(2.7)	0.7
Cost of employee share schemes	1.8	1.1
Movement in provision for costs of reorganisation of distribution network	(0.7)	(2.3)
Movement in property provisions	(1.3)	(0.7)
Movement integration provisions	13.6	-
Movement in restructuring provisions	(1.6)	1.6
Movement in other provisions	0.3	0.2
Amortisation of lease incentives	(2.8)	(1.4)
Lease incentives received	0.9	7.8
Payments to retirement benefit schemes	(4.3)	(4.5)
Charge to profit from operations in respect of service costs of retirement benefit schemes	0.7	1.2
Operating cash flow before movement in working capital	46.2	34.9
Increase in inventories	(2.4)	(1.0)
Increase in receivables	(3.8)	(10.5)
Increase in payables	14.7	5.5
Cash generated from operations	54.7	28.9
Income taxes paid	(2.9)	(1.4)
Net cash flow from operating activities	51.8	27.5

 

END

 

 

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