Mothercare plc

Interim results announcement

The true potential of the Group starting to show post restructuring

Mothercare plc ("Mothercare" or "the Group" or "Company"), the global specialist brand for parents and young children, today announces unaudited half year results for the 26-week period to 25 September 2021 ("H1 FY22"). The comparative period was a 28-week period to 10 October 2020 ("H1 FY21"). At the beginning of this financial year the Company moved from 13 periods of 4 weeks per annum to 12 periods. Each quarter of the year includes 3 periods, with the first two of 4 weeks, followed by a 5 week period. This has resulted in H1 FY22 figures being for a period of 2 weeks, 7% less than H1 FY21 comparatives.

Key Highlights

·      Adjusted EBITDA of £5.6 million (H1 FY21: loss of £(0.1) million) demonstrates the benefit of the actions we have taken over recent years to transform the Group and reflects the true potential in the business, despite the significant negative impact of Covid-19.

·      Group adjusted profit before taxation from operations of £3.6 million (H1 FY21: loss of £(4.4) million).

·      Total Group profit before taxation of £3.6 million (H1 FY21: loss of £(13.2) million).

·      Initiatives implemented to deliver further improved profitability when we return to more normal pre-pandemic levels of business.

·      Strong order book from franchise partners for autumn/winter 2022 season, the second season of our new elevated product offering following positive feedback from global franchise partners.

·      Net debt at 25 September 2021 of £13.5 million (£26.8 million at 10 October 2020).

·      Pension scheme deficit materially reduced to £91 million as at 30 October 2021 (£124.6 million deficit at 31 March 2020).

Our Group 

 Our Franchise partners 

Clive Whiley, Chairman of Mothercare plc, commented:

"I am pleased to announce results that demonstrate we are moving closer to unlocking the true underlying potential of Mothercare, reflecting the strong foundations we have created for the business over recent years, despite the impact that Covid-19 still has had over the period.

With positive feedback to our new product ranges, and a lean operating structure, we enter the second half with growing confidence for our future prospects."

Investor and analyst enquiries to:

Mothercare plc                                                                                        Email: investorrelations@mothercare.com

Clive Whiley, Chairman

Andrew Cook, Chief Financial Officer                                                     

Numis Securities Limited (Nominated Advisor & Joint Corporate Broker) Tel: 020 7260 1000

Luke Bordewich

Henry Slater

finnCap (Joint Corporate Broker)                                                                         Tel: 020 7220 0500

Christopher Raggett

Media enquiries to:

MHP Communications                                                                                            Email: mothercare@mhpc.com

Simon Hockridge                                                                                                       Tel: 020 3128 8789

Tim Rowntree

Alistair de Kare-Silver                                                                    

Notes

1 - Worldwide retail sales are total International retail franchise partner sales to end customers (which are estimated and unaudited) in relation to continuing operations only. International stores refer to overseas franchise and joint venture stores.

2 - Adjusted figures are stated before the impact of the adjusting items set out in note 4.

3 - Net Debt is defined as total borrowings including shareholder loans, cash at bank and IFRS 16 lease liabilities.

4- The comparative results for the period to 10 October 2020 have been restated to reflect the impact of the prior year adjustments, as detailed in note 16.

5 - This announcement contains certain forward-looking statements concerning the Group. Although the Board believes its expectations are based on reasonable assumptions, the matters to which such statements refer may be influenced by factors that could cause actual outcomes and results to be materially different. The forward-looking statements speak only as at the date of this document and the Group does not undertake any obligation to announce any revisions to such statements, except as required by law or by any appropriate regulatory authority.

6 - The information contained within this announcement is deemed by the Company to constitute inside information for the purposes of the Market Abuse Regulation (EU) No 596/2014. Upon the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain. 

7 - The person responsible for the release of this announcement is Lynne Medini, Group Company Secretary at Mothercare plc, Westside 1, London Road, Hemel Hempstead, HP3 9TD.

8 - Mothercare plc's Legal Entity Identifier ("LEI") number is 213800ZL6RPV9Z9GFO74.

Chairman's statement

Overview

Whilst the business is still being heavily impacted by the effects of Covid-19, these results show the transformation that has been achieved by the Group over recent years and the potential moving forward. Throughout the pandemic Mothercare has demonstrated its strength and resilience as a leading global parenting brand and celebrated its 60^th anniversary in September this year. These strong foundations would not have been possible without the commitment and support of all our stake-holders, including our Mothercare colleagues, our franchise partners, our manufacturing partners, our pension scheme trustees and our investors.

Across this period Covid-19 has continued to have a significant impact on several elements of our business throughout the world, above levels that those of us based in the UK have been experiencing. At the half year end, we still had just over 10% of our partners' global stores closed. Despite these headwinds we have achieved a considerable improvement in our profitability, as the initiatives we  have previously implemented begin to bear fruit and the Group is well placed for further improvements in performance as retail sales return to their pre-pandemic levels across the globe.

Trading Update & Outlook

Half year retail sales of £184 million are largely in line with the levels for the equivalent period for last year. Both years have been heavily impacted by Covid-19 and remain over 25% below the levels we would otherwise expect. The online retail sales for the period to October 2020 were significantly higher than previous years, reflecting the increased online activity due to store closures at that time. For the period to September 2021 with more stores open, the online sales whilst lower than those to October 2020, represent 9.5% of total retail sales more than double the 4.9% that the online sales represented in the half year period to October 2019.

The ongoing disruption to global freight movement resulted in some products for the autumn/winter 2021 season being delivered to our franchise partners at the beginning of this financial period rather than the previous financial year as would usually happen. This will have moved some of the margin into this financial period, though true year on year comparisons are difficult as the period to October 2020 was also impacted by delays and variations caused by the administration of Mothercare UK in November 2019.

We have recently presented our enhanced clothing range for the autumn/winter 2022 season to our franchise partners and both the feedback and orders have been very positive. Our clothing ranges, whilst still offering great choice at a variety of price points, are now offering improved design, fashionability, quality, and value, that will result in clearer differentiation from our competitors' offerings. The first full season with this elevated product range will be spring/summer 2022, which is launching in stores in January next year. We have been excited to see the reaction of our franchise partners and we look forward to seeing customer feedback and learning from their buying behaviours to further improve and refine our product offering for future seasons.

Absent any significant further impact from Covid-19, based on the reaction of our franchise partners and the levels of product that they have already committed to buy for the two 2022 seasons, this would result in retail sales for our franchise partners of around £500 million for the calendar year 2022. Whilst not a direct comparison, our franchise partners' worldwide retail sales for the financial year to March 2020 were £542 million.

Since the end of our previous financial year we have faced several lockdowns and restrictions in our franchise territories. Our manufacturing partners have also faced disruptions - such as lockdowns in India and Bangladesh and power restrictions in China - and we have continued to experience delays and uncertainties in global shipping. The resultant impact on the availability of product on time for our franchise partners has impacted their ability to sell the product at full price and compounded local Covid-19 related restrictions. In our markets where our franchise partners sell a significant portion of locally sourced, non-Mothercare branded product, on which they invariably achieve lower margins, this reduction in profitability has been even more pronounced. One of the ways we are seeking to support these markets is by further increasing our offer of Mothercare branded products in areas other than clothing, which account for the majority of these locally sourced products.

Whilst we remain cautious given the ongoing pandemic restrictions and supply chain headwinds, we believe that the second half of this financial year should deliver a performance at similar levels to the first half. Our medium-term guidance remains that the steady state operation of our existing franchise operations, in more normal circumstances, should exceed £15 million operating profit. Furthermore, with encouraging results from our recent focus on product design we are now concentrating our efforts upon accelerating the growth of our brand exposure to new and attractive markets.

Growth Opportunities

In our last Annual Report I outlined the areas that we are exploring to grow our bottom line:

-    organic growth within our existing territories,

-    entering new territories and

-   step change growth beyond our historic limits.

We are encouraged by early discussions around the opportunities of licensed product in both our existing and new territories and there is some interest in the use of our brand beyond the current product ranges. We are evaluating various possibilities of entering new territories with a pure online business either directly ourselves via a marketplace type offering or with partners that would provide the website and full supply chain capability as an alternative to our existing franchised markets.  Furthermore we have reviewed other opportunities and are optimistic that we will be able to bring synergies and enhanced profitability into our business as the core strengths of the Group continue to demonstrate momentum.

We will update further on these opportunities as they progress. 

Update on Initiatives

Supply chain model

We continue to develop our supply chain to reduce cost, complexity and deliver goods to our franchise partners in the quickest way. With shipping for spring/ summer 2022 underway, we will deliver circa 84% of our products direct from our country of manufacturing to our retail partners' markets. By autumn/winter 2022 we expect this figure to rise to 88%. Our UK distribution centre will close as planned early next year.

Enterprise Resource Planning ('ERP') System

The project is progressing well and we are confident that the final system will deliver at least the expected benefits and cost savings. During the initial phase we identified some potential improvements, which will delay the go live date slightly to around the middle of 2022 but should provide a better and more stable outcome. The final system will consist of a leading product lifecycle management system ('PLM') integrated with a supply chain and finance system with portal-based access for both our franchise partners and manufacturing partners to both input and access information.

Brand Review

We have recently commissioned an in-depth review of our brand position and customer perceptions across ten of our markets. We believe this is an important project as over the years, in our international markets, the brand has not been clearly and consistently communicated. As we dedicate more cost and resource to elevating our product it becomes increasingly important that our brand strategy is clear and our customers' expectations are met. This project will complete in early 2022 and we look forward to reviewing the results to inform future brand strategy.

Cost Reductions

The results for the first half of the year show a further reduction in administrative expenses of 13% compared to last year demonstrating our continual review and challenge of costs, whilst still ensuring we operate to the standards of a world class business.  

Pension Schemes

The last full actuarial valuation of the schemes was at 31 March 2020 and showed a deficit of £124.6 million, resulting from total assets of £383.7 and total liabilities of £508.3 million. Based on a desktop review of this valuation provided to the pension scheme trustees, as at 30/10/21 the deficit has reduced by 27% to £91 million with total assets at £424 million and total liabilities of £515 million. The reduced deficit is attributable to the contributions made by the Group of £8m, coupled with an improvement in the valuation of the investments from a relatively depressed position in March 2020.

The current recovery plan is for payments in the financial years to: March 2022 £4.1 million; March 2023 £9.0 million; March 2024 £10.5 million; March 2025 £12 million; March 2026 to March 2030 £15 million each year and March 2031 £3.3 million. 

Based on actuarial modelling there is a 50% chance that the schemes will be full funded by March 2027, which would mean, on a purely theoretical basis, a reduction in the deficit recovery contributions of some £50 million in aggregate over the planned contributions period, if this 50% chance occurred.

The next full actuarial valuation, at which time the recovery plan will be formally reviewed, will be at March 2023. At that time if the recent reduction in the deficit remains, the subsequent annual payments could be significantly reduced.  

Clive Whiley

Chairman
 

Condensed consolidated income statement

For the 26 weeks ended 25 September 2021

(1)     Adjusted items included: property related costs, restructuring costs included in administrative expenses and the fair value movement on embedded derivatives.  Adjusted items are one-off or significant in nature and or /value. Excluding these items from the profit metrics provides readers with helpful additional information on the performance of the business across the periods because it is consistent with how business performance is reviewed by the Board and Operating Board. 

* The comparative results for the period to 10 October 2020 have been restated to reflect the impact of the prior year adjustments, as detailed in note 16.

Condensed consolidated statement of comprehensive income

For the 26 weeks ended 25 September 2021

Condensed consolidated balance sheet

As at 25 September 2021

Condensed consolidated statement of changes in equity

For the 26 weeks ended 25 September 2021 (unaudited)

For the 28 weeks ended 10 October 2020 (unaudited)

For the 52 weeks ended 27 March 2021 (audited)

Condensed consolidated cash flow statement

For the 26 weeks ended 25 September 2021

Notes to the condensed consolidated financial statements

1       General information

The review of the Group's business activities, together with factors likely to affect its future development, performance and position are set out in the Financial Highlights and Chairman's Statement.

The results for the 26 weeks ended 25 September 2021 are unaudited.

These unaudited condensed consolidated interim financial statements for the current period and prior financial periods do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the 2021 financial year has been filed with the Registrar of Companies. The 2021 financial statements are available on the Group's website (www.mothercareplc.com).  The auditor has reported on these: their report was qualified.

2       Accounting Policies and Standards

Basis of preparation

These unaudited condensed consolidated interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Conduct Authority, and with IAS 34 'Interim Financial Reporting', as adopted by the European Union. Unless otherwise stated, the accounting policies applied, and the judgements, estimates and assumptions made in applying these policies, are consistent with those described in the Annual Report and Financial Statements 2021. The financial period represents the 26 weeks ended 25 September 2021. The comparative periods are the 28 weeks ended 10 October 2020 and the 52 weeks ended 27 March 2021.

Going concern

When considering the going concern assumption, the Directors of the Company have reviewed a number of factors, including the Company's trading results and its continued access to sufficient borrowing facilities against the Company's latest forecasts and projections, comprising:

1)   A Base Case forecast, which is built up at franchise partner level and incorporates key assumptions specific to each partner and the impact of Covid‐19 in each jurisdiction. This Base Case forecasts that the sales for the financial year to March 2022 increase to levels similar to those achieved immediately before the impact of Covid‐19 and the sales for the year to March 2023 show a more modest increase.

2) A Sensitised forecast, which applies sensitivities against the Base Case for reasonably possible adverse variations in performance, reflecting the ongoing volatility in our key markets. This assumes the following additional key assumptions:

·    A delayed recovery that assumes that retail sales remain subdued throughout the majority of the forecast period as a result of continued restrictions on both our franchise and manufacturing partners as a result of Covid‐19.

·    The potential for subsequent reintroduction or imposition of new measures to control Covid‐19 in areas that will restrict both our franchise and manufacturing partners and consequentially impact our retail sales.

·    The Sensitised forecast shows a decrease in sales of 7% as compared to the Base Case in the financial years to March 2022 and 2023, with the net working capital and the overhead costs assumed to remain constant. Despite showing a decrease against the Base Case, the assumptions still assume an increase in revenue from the financial years 2021 to 2022. The four debt covenants are also not forecast to be breached under this scenario; and

3) A Reverse Stress Test which assumes an overall increase in net sales in the financial year to March 2022 of around half that used in the Base Case.

Notes to the condensed consolidated financial statements

2       Accounting Policies and Standards (continued)

Going concern (continued)

Based on the sales to date in the current financial year to March 2022, the Company is significantly behind the Base Case forecast due to the adverse impact of Covid‐19 in certain jurisdictions. This post year end performance could extend throughout the going concern assessment period as a result of the ongoing Covid‐19 restrictions and has therefore already demonstrated that the Base Case scenario is challenging.

The Board's confidence that the Company will operate within the terms of the borrowing facilities, and the wider Group's proven cash management capability supports our preparation of the financial statements on a going concern basis. We have modelled a substantial reduction in global retail sales in our sensitised case and reverse stress test as a result of possible future store closures and subdued consumer confidence or as a result of reduced availability due to restrictions in our manufacturing partners to maintain production and supply chain constraints throughout the remainder of FY22 with recovery in FY23.

The impact of the pandemic on the future prospects of the Company is not fully quantifiable at the reporting date, as the complexity and scale of restrictions in place at a global level is outside of what any business could accurately reflect in a financial forecast. However, if  trading conditions were to deteriorate beyond the level of risks applied in the sensitised forecast, or the Company and the wider Group were unable to mitigate the material uncertainties assumed in the Base Case Forecast and the wider Group were not able to execute further cost or cash management programmes, the Company would at certain points of the working capital cycle have insufficient cash. If this scenario were to crystallise the Company would need to renegotiate with its lender in order to secure waivers to potential covenant breaches and consequential cash remedies or secure additional funding. Therefore, on this basis, the Directors have concluded that there is a material uncertainty that may cast significant doubt on the Company's ability to continue as a going concern.

Adoption of new IFRSs

The same accounting policies, presentation and methods of computation are followed in this half yearly report as applied in the Group's last audited financial statements for the 52 weeks ended 27 March 2021.

Standard issued but not yet effective

There are no standards issued but not yet effective that have been identified as expected to have a material impact on the disclosures or the amounts reported in these financial statements.

Foreign currency adjustments 

Foreign currency monetary assets and liabilities are revalued to the closing balance sheet rate under IAS21 "The Effects of Changes in Foreign Exchange Rates".

Taxation

The taxation charge for the 26 week period is calculated by applying the best estimate of the average annual effective tax rate expected for the full year to the profit/loss for the period after adjusting for any significant one-off items, and a tax credit is recognised only to the extent that the resulting tax asset is more than likely not to reverse.

Notes to the condensed consolidated financial statements

2      Accounting Policies and Standards (continued)

Retirement benefits

Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due.

For defined benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside of the income statement and presented in other comprehensive income.

Past service cost is recognised immediately to the extent that the benefits are already vested.

The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation less the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds.

The Group has an unconditional right to a refund of surplus under the rules.

In consultation with the independent actuaries to the schemes, the valuation of the pension obligation has been updated to reflect: current market discount rates; current market values of investments and actual investment returns; and also for any other events that would significantly affect the pension liabilities. The impact of these changes in assumptions and events has been estimated in arriving at the valuation of the pension obligation.

Alternative performance measures (APMs)

In the reporting of financial information, the Directors have adopted various APMs of historical or future financial performance, position or cash flows other than those defined or specified under International Financial Reporting Standards (IFRS).

These measures are not defined by IFRS and therefore may not be directly comparable with other companies' APMs, including those in the Group's industry.

APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measures.

Purpose

The Directors believe that these APMs assist in providing additional useful information on the performance and position of the Group because they are consistent with how business performance is reported to the Board and Operating Board.

APMs are also used to enhance the comparability of information between reporting periods and geographical units (such as like-for-like sales), by adjusting for non-recurring or uncontrollable factors which affect IFRS measures, to aid the user in understanding the Group's performance.

Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive setting purposes and have remained consistent with prior year except where expressly stated.

Notes to the condensed consolidated financial statements 

2          Accounting Policies and Standards (continued)

The key APMs that the Group has focused on during the period are as follows:

Group worldwide retail sales 

Group worldwide sales are total International retail sales, which are the estimated retail sales of overseas franchise and joint venture partners to their customers.  Total Group revenue is a statutory number and is made up of total receipts from International franchise partners, which includes royalty payments and the cost of goods dispatched to international franchise partners.

International like-for-like sales

International like-for-like sales are the estimated franchisee retail sales from stores that have been trading continuously from the same selling space for at least a year. The Group reports some financial measures on both a reported and constant currency basis. Sales in constant currency exclude the impact of movements in foreign exchange translation. The constant currency basis retranslates the previous year revenues at the average actual periodic exchange rates used in the current financial year. This measure is presented as a means of eliminating the effects of exchange rate fluctuations on the year-on-year reported results.

Profit/(loss) before adjusted items

The Group's policy is to exclude items that are one-off and significant in nature and/or value and where treatment as an adjusted item provides stakeholders with additional useful information to assess the year-on-year trading performance of the Group.

3       Segmental information

IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reported to the Group's executive decision makers (comprising the executive directors and operating board) in order to allocate resources to the segments and assess their performance. Under IFRS 8, the Group has not identified that its continuing operations represent more than one operating segment.

Previously, the Group reported on two segments: UK and International; control of the UK segment was lost on 5 November 2019, and as a result only the International business remains as a continuing operation.

Management have identified that the former Mini Club operation could constitute a separate operating segment as it had its own operational manager, however it was considered to meet all the aggregation criteria under IFRS 8, including: the nature of products; the nature of the production processes; the type or class of customer; the methods used to distribute products; and the nature of the regulatory environment. As the Mini Club operation ceased in October 2020, it is no longer an aggregated operating segment.

The results of franchise partners are not reported separately, nor are resources allocated on a franchise partner by franchise partner basis, and therefore have not been identified to constitute separate operating segments.

Notes to the condensed consolidated financial statements

4          Adjusted items

Due to their significance or one-off nature, certain items have been classified as adjusted items as follows:

Property related (income)/costs included in administrative expenses - £0.5 million credit (H1 FY21 restated: £2.2 million charge)

Following an agreed settlement during the period, there was a £0.5 million release of provisions in relation to onerous lease costs prior to the administration of Mothercare UK Limited (H1 FY21: £1.2 million charge). The release of provision represented amounts settled by the Group during the period.   

In the comparative period there were also £1.0 million of costs not recognised this period, which comprised:

-    £0.5 million of costs in relations to the relocation of IT servers incurred due to the change in Head Office location

-    £0.5 million of costs in relation to the Group's warehouse facility, which has now been assigned to a new tenant - including legal costs, utilities, and dilapidations severance and legal fees in relation to group restructuring.

Other restructuring costs included in administrative expenses - £0.1 million (H1 FY21: £0.3 million credit)

During the period, £0.1 million of severance pay related costs were incurred as a result of Group restructuring of operations.

In the comparative period, a credit of £0.3 million was recognised, which related to a specific pay provision for the potential costs of complying with the National Minimum Wage (NMW)‌‌ Regulations. The liability arose due to time off in lieu payments timing not meeting the requirements of the NMW regulations, and incidences of colleagues purchasing items of uniform that take the average pay below that required by NMW threshold. The initial provision of £0.5 million based on detailed workings for one year, was trued up to a net credit of £0.3 million due to settlements made within the year.

Restructuring costs included in finance costs - £nil million (H1 FY21: £6.8 million)

In the comparative period, there was £6.8 million, which related to an increase in the embedded derivative liability. The increase in the liability included the conversion options for four additional shareholder loans from the second equity raise in November 2019 and reduced conversion price of the four original shareholder loans from the first equity raise in May 2018. 

The terms of the Shareholder loans allowed for these loans to be converted into new ordinary shares of the Company at specific dates. The lenders' option to convert represented an embedded derivative that was fair valued using a Black Scholes model at each balance sheet date. These loans were converted into equity in March 2021.

Notes to the condensed consolidated financial statements 

5       Net finance costs

6       Taxation

7       Earnings/(losses) per share

The total dividend for the period is nil pence per share (H1 FY21: nil pence per share).

Notes to the condensed consolidated financial statements

8   Tangible fixed assets and Software assets

There were £ nil millions of additions to Right-of-use assets in the period.

Capital additions of £0.3 million were made during the period (H1 FY21: £0.2 million). These comprised tangible fixed assets of £nil million (H1 FY21: £0.1 million) and software assets of £0.3 million (H1 FY21: £0.1 million).

9   Borrowings

The Group had outstanding borrowings at 25 September 2021 of £19.0 million (27 March 2021: £19.0 million) ‌‌.

The term loan of £19.5 million (£19.0 million net of prepaid facility fees) (27 March 2021: £19.0 million) is secured on the assets and shares of specific Group subsidiaries. Interest amounts payable on this facility are not materially sensitive to changes in LIBOR, the interest rate payable is 12% plus LIBOR, with LIBOR at a minimum rate of 1%.

10     Retirement benefit schemes

The Group has calculated the value of its pension liability under IAS 19 as at 25 September 2021. The FY21 year end assumptions have been rolled forward and updated for changes in market rates over the current interim period.

For the two schemes, based on the actuarial assumptions from the last full actuarial valuations carried out as of March 2020 and using the rolled forward assumptions referred to above, a net liability of £22.0 million (H1 FY21: £28.8 million) has been recognised. This represents a material decrease year-on-year, primarily as a result of lower discount rate assumptions and increase in long term inflation expectations.

11     Financial instruments: fair value disclosures

The Group held the following financial instruments at fair value at 25 September 2021.

At the reporting date, the Group has warrants which provides the opportunity to purchase shares at an exercise price of 12 pence per share and a financial guarantee over a leasehold premises previously traded as Mothercare UK Ltd (in administration). The option to purchase at the exercise price is fair valued and treated as an embedded derivative. The fair value of embedded derivatives arising on the warrant has been measured using the Black-Scholes model, is based on quoted prices and falls under level 2 of IFRS 7's fair value hierarchy.

Notes to the condensed consolidated financial statements

11        Financial instruments: fair value disclosures (continued)

In the comparative year, the Group held shareholder loans which provided an opportunity for conversion to equity at specified dates. The shareholder loans were accounted for at an amortised cost of £15.1 million. The option to convert was treated as an embedded derivative and fair valued

at £7.1m. The fair value of embedded derivatives arising on shareholder loans was measured using the Black-Scholes model, was based on quoted prices and also falls under level 2 of IFRS 7's fair value hierarchy.

The derivative financial assets and liabilities, whose fair values include the use of level 2 inputs are obtained from the banks and financial institutions with which the derivatives have been transacted, subject to adjustment for credit risk if necessary.  The value of these is therefore categorised within level 2 of the fair value hierarchy set out in IFRS 7.

The valuations incorporate the following inputs:

·      interest rates and yield curves at commonly quoted intervals;

·      observable credit spreads;

·      share price; and

·      interpolated zero coupon LIBOR rates.

The Group's financial asset (Level 3 within the IFRS 7 hierarchy) represents a right, arising under the sales purchase agreement with the administrators of MUK, to receive the proceeds of the wind-up of the UK retail store estate and website operations as repayment for the Group's secured borrowings. It has been estimated by the administrators that the Group will receive £2.6 million (H1 FY21: £11.0 million). Many of the outflows which would impact the valuation of this financial asset are finalised, with the final repayment being dependent on the amounts to be received back by the merchant acquirer and final settlement of VAT.

The Directors consider that the carrying value amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements are approximately equal to their fair values.

12        Share-based payments

A charge is recognised for share-based payments based on the fair value of the awards at the date of grant, the estimated number of shares that will vest and the vesting period of each award. The total net charge for share-based payments under IFRS 2 is £0.3 million (H1 FY21: £0.4 million).

Notes to the condensed consolidated financial statements

13        Notes to the cash flow statement

Analysis of net debt

14        Related party transactions

Transactions between the Group and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures and associates are disclosed below.

Trading transactions:

Revenue earned from related parties includes royalty income on retail sales of related parties to their customers, plus sales of goods to related parties made at the Group's usual list price.

A provision of £1.8 million (H1 FY21: £2.0 million) exists for doubtful debts in respect of the amounts owed by the related party.

The amounts outstanding are unsecured and will be settled in cash.

Notes to the condensed consolidated financial statements

15        Post balance sheet events

Shutdowns due to Covid-19 are ongoing, and the uncertainties in relation to this have continued after the year end. Whilst the future impact remains unknown, to date there has been a broad impact across both the supply chain and the franchise partner network, with factories and stores closing in multiple territories.

The Group received distribution proceeds of £1.2m from the administrators of Mothercare UK Ltd and Mothercare Business Services Ltd in relation to the wind-down of the UK operations. These proceeds reduced the financial asset value held by the Group as at 25 September 2021.  

16        Restatement for period ended 10 October 2020

After the Annual Report for the year ended 28 March 2020 was approved, the Group was approached by a third party about a lease liability relating to Mothercare UK Ltd. Despite Mothercare UK Ltd being in administration, this was an amount that the Group were liable for due to a cross-guarantee with Mothercare PLC. The impact of this prior year adjustment on the income statement for the comparative year has been to increase the adjusted items expense and losses by £1.3 million.

For the period ended 10 October 2020, the restated retained losses brought forward and provisions needed to be restated to reflect the prior year restatements. Therefore, a further prior year restatement was recognised in the period ended 10 October 2021 which included an increase in the provisions and retained losses by £0.4 million. In H1 FY21, £0.9 million of the onerous lease provision was already recognised. 

An agreed settlement was reached during the period under review in relation to this lease resulting in release of part of this provision as included in note 4.

Under the Group's accounting policy, amounts which have fallen due are treated as financial guarantee contracts under IFRS 9: Financial instruments. Amounts which are a potential future liability are accounted for under IAS 37: Provisions.

Additionally, the Group had previously disclosed the deferred tax liability on the defined benefit pension scheme at the underlying corporation tax rate - this was on the basis that the scheme is currently in a funding deficit, and further, there was no expectation a surplus payment would ever be received. However, the deferred tax liability in the comparative period has been increased to reflect the 35% withholding tax which would be paid in the highly unlikely event the scheme were to return to a surplus position in future years. The impact of this prior year adjustment on the balance sheet has been to increase the deferred tax liability and reduce retained earnings by £5.0 million as at 28 March 2020.

For the period ended 10 October 2020, this prior year restatement was recognised because the deferred tax liability was not fully released until the 27 March 2021.

Additional Disclosures

Embedded enterprise risk management framework

We have implemented an embedded enterprise risk management (ERM) framework which applies to every part of our business operations. The primary focus of ERM is to manage the principal and emerging risks to the business and to support management in risk-based decision making. The Board monitors ERM by assessing the effectiveness of internal controls and effectiveness of risk management. Clear risk tolerance levels across strategic, operational and reputational risks are set by the Board enabling consistent and risk aware decision making.

Principal risks and uncertainties

Our Principal Risks are those that can materially impact our performance, opportunities or reputation. Our Executive, Audit and Risk Committee, and Operating Board, undertake an assessment of our Principal risks at least annually in relation to achieving our strategy and our future performance. Mothercare has a policy of continuously identifying and reviewing Principal Risks. Workshops are held with department leaders to identify, assess and evaluate Principal Risks, and with the Operating Board to discuss, evaluate, mitigate and own Principal and operational risks. The following risks have been agreed:

·      Liquidity

·      Dependence on a small number of partners

·      New business model

·      Covid-19

·      Challenging global economic and political conditions

·      ERP system

·      Regulatory and legal

·      Brand, reputation and relationships

Directors' Responsibility statement

The Directors are responsible for preparing the Interim Results for the 26-week period ended 25 September 2021 in accordance with applicable law, regulations and accounting standards. The Directors confirm that to the best of their knowledge the condensed consolidated interim financial statements have been prepared in accordance with IAS 34: 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

·      an indication of the important events that have occurred during the first 26 weeks of the financial year and their impact on the condensed consolidated interim financial statements, and a description of the principal risks and uncertainties for the remaining 26 weeks of the financial year; and

·      material related party transactions in the first 26 weeks of the year and any material changes in the related party transactions described in the last annual report.

The Directors of Mothercare plc are listed on page 42 of the Mothercare plc Annual Report and Financial Statements 2021. A list of directors is maintained on the Mothercare plc website at: www.mothercareplc.com. With the exception of today's announcement, there have been no changes since the publication of the Annual Report.

By order of the Board

Clive Whiley                                                                      Andrew Cook

Chairman                                                                     Chief Financial Officer

25 November 2021

Shareholder information 

Financial calendar

Registered office and head office

Westside 1, London Road, Hemel Hempstead, Hertfordshire HP3 9TD

Telephone 01923 241000

www.mothercareplc.com

Registered number 1950509

Group Company Secretary

Lynne Medini

Registrars

Administrative enquiries concerning shareholders in Mothercare plc for such matters as the loss of a share certificate, dividend payments or a change of address should be directed, in the first instance, to the registrars:

Equiniti Limited

Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA

Telephone 0371 384 2013

Overseas +44 (0)121 415 7042

www.shareview.co.uk

Postal share dealing service

A postal share dealing service is available through the Company's registrars for the purchase and sale of Mothercare plc shares from the www.shareview.co.uk website or on the shareholder helpline Telephone 0371 384 2013, Overseas +44(0)121 415 7042.

Further details can be obtained from Equiniti on 0371 384 2013 (calls to this number are charged at the standard landline rate per minute plus network extras. Lines are open 8.30 am to 5.30pm, Monday to Friday).

The Company's stockbrokers are:

Numis Securities Limited

45 Gresham Street

London EC2V 7BF

Telephone 020 7260 1000

finnCap Limited

One Bartholomew Close

London EC1A 7BL

Telephone 020 7220 0500

ShareGift

Shareholders with a small number of shares, the value of which makes it uneconomic to sell them, may wish to consider donating them to charity through ShareGift, a registered charity administered by The Orr Mackintosh Foundation. The share transfer form needed to make a donation may be obtained from the Mothercare plc registrars, Equiniti Limited.

Further information about ShareGift is available from www.sharegift.org or by telephone on 020 7930 3737.