July 26, 2019 / 6:33 AM / 23 days ago

UPDATE 2-UK's Mothercare sees no growth in annual profit as shoppers turn gloomy

* Underlying FY profit to be broadly comparable to 2018

* Promotional activity hurts margins

* Company aims to be debt-free this year

* Interactive graphic on Mothercare's performance here tmsnrt.rs/2HWV8dn (Adds details on sector, debt, share price)

By Tanishaa Nadkar and Noor Zainab Hussain

July 26 (Reuters) - Struggling British baby products retailer Mothercare Plc said on Friday it would not report a rise in annual profit, blaming an uncertain and volatile home market coupled with fragile consumer confidence.

The gloomy outlook is a far cry from its mood a decade ago when Mothercare had almost 400 British stores and nearly 700 international ones as it looked to develop a global wholesale business.

The company, which has been hit hard by intense competition from supermarkets and online retailers in its main domestic market, said total UK sales were 23.2% lower for the 15 weeks ended July 13, following an extensive store closure programme.

Shares in Mothercare were 11.4% lower at 17.5 pence, far from its peak share value of 751.7 pence in 1987.

Britain’s retail sector is still reeling from the collapse of well known names such as Debenhams, music store HMV and department store House of Fraser.

Mothercare, which floated in 1972 and has been a mainstay of the British shopping scene, has closed one third of its British stores in the past year through a company voluntary arrangement (CVA).

CVAs allow retailers to avoid insolvency by offloading unwanted stores and securing lower rents.

British consumers’ darkening mood over the economy and the outlook for personal finances, added to signs of a lacklustre second quarter for the economy.

Mothercare, whose British business has been unprofitable for more than a decade, also said it had worked to create the “optimal structure” for its retail operations in the country as an independent Mothercare UK franchise.

Total group sales for the retailer fell 9.2% in the first quarter.

FinnCap analyst Peter Smedley cut his financial year 2020 adjusted pretax earnings estimates to a loss of 11.6 million pounds from a profit of 3.3 million pounds.

“Having delivered several updates characterised by forecast stability, today’s update will likely be perceived somewhat by the stock market as a disappointment, but to a great extent explicable by wider market turmoil,” he said.

DEBT FREE

Mothercare, which said the rate of decline in comparable UK sales has moderated, also expects gross margin improvements in the country to take longer to materialise than expected, as it spends on promotional activity to stimulate sales.

“The process of restructuring and rebuilding a sustainable business continues, and we have in place financing plans to support these actions as we aim to be bank-debt free by the end of the year,” Chief Executive Officer Mark Newton-Jones said.

Mothercare saved more money than expected last year from the store closures on which it has pinned its hopes of recovery, helping fuel expectations that the company will meet its target of being debt-free.

Mothercare’s combined credit score, which measures how likely a company is to default in the next year on a scale of 100 (very unlikely) to 1 (highly likely) - was “1” as of Friday, according to Refinitiv Eikon data.

The company’s net debt was 6.9 million pounds as at March 30, 2019.

Reporting by Tanishaa Nadkar and Noor Zainab Hussain and additional reporting by Pushkala Aripaka in Bengaluru; Editing by Shounak Dasgupta and David Evans

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