UPDATE 1-New boss says "outdated" Mothercare needs investment

Thu Jul 17, 2014 5:19am EDT

* Q1 UK like-for-like sales up 0.9 pct

* CEO to move away from aggressive discounting in UK

* Will focus on cost reduction, cash generation, margins

* Q1 international sales at constant currency up 14.7 pct

* Shares down 8.4 pct (Recasts, adds detail, CEO, analyst comment, shares)

By James Davey

LONDON, July 17 (Reuters) - The new boss of British mother and baby products retailer Mothercare, the subject of bid interest from U.S. group Destination Maternity, said the company operates in an outdated way in its key home market and requires investment.

Mothercare operates in 60 countries but has been hit hard by cut-price competition from supermarket groups and online retailers in its domestic market, where it does not expect to make a profit until 2016 or 2017.

"The business needs modernising and requires investment in its infrastructure, its stores and its head office systems," said Mark Newton-Jones, who became the firm's permanent chief executive this month after four months as interim CEO.

"As a result, many of the retail practices are somewhat outdated when we compare ourselves to more modern retailers."

Talking to reporters on Thursday, when Mothercare also gave an update on first-quarter trading, Newton-Jones would not say how much investment is needed in the 220-store UK business, whether additional capital is required or if he plans more store closures beyond those already projected.

He said he would detail his plans for the business in the autumn after he has completed a strategic review.

Newton-Jones has already changed Mothercare's trading strategy in the UK, moving away from aggressive discounting and concentrating on full-price sales to rebuild gross margins.

He has also talked to suppliers about improving terms, is consulting with 15 percent of the 4,500-strong UK workforce to adjust their hours and plans improvements to in-store and online service, as well as product improvement, with less emphasis on value ranges.

BIDS REJECTED

The CEO said Mothercare's lead time for bringing in new products is half what it should be - about 20 weeks, against 10-12 weeks at fast-moving retail businesses.

Nevertheless, Mothercare has rejected two bid proposals from its U.S. suitor, saying they undervalued the company and its prospects.

Shares in Mothercare, down 41 percent over the past year, fell 8.4 percent to 257 pence by 0828 GMT, valuing the business at 227 million pounds ($388 million).

Destination Maternity's second bid proposal was pitched at 300 pence a share.

Newton-Jones declined to say if he expected the U.S. company to come back with a higher offer before a July 30 deadline.

"Given the track record of quarterly volatility, and uncertainty in terms of the new chief executive's plans, we think that the risk-reward ratio here is unfavourable," said analysts at Liberum, adding that they do not think a successful bid from Destination Maternity is likely to emerge.

Mothercare sales at British stores open for more than a year rose 0.9 percent in the 15 weeks to July 12, its financial first quarter, compared with the same period last year.

Sales in its overseas division were up 14.7 percent in the period on a constant-currency basis but increased 0.8 percent on a reported basis, reflecting currency devaluation in Russia, Turkey, India and Indonesia. ($1 = 0.5844 British Pounds) (Editing by Neil Maidment and David Goodman)

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