Mothercare to sell ELC for £13.5m, says transformation plan on track

Mothercare said on Tuesday that it has agreed to sell Early Learning Centre to TEAL Group Holdings, - the owner of The Entertainer toy shops - for £13.5m in cash, as it confirmed that its transformation plans are on track.

The retailer said it does not have the necessary capital, resources or scale to continue to invest and develop the own-brand ELC toys needed to maximise returns.

Mothercare will hold on to £6m of inventory relating to ELC that it will sell over the coming months, with the proceeds set to be used to reduce bank debt by around £17.5m over the next year.

"The disposal secures attractive cash proceeds for ELC and its inventory, with additional long-term arrangements also put in place with The Entertainer for an improved toy retailing proposition within our UK stores and for supply to ELC's overseas partners," it said.

The group also said that its transformation plan remains on track, with the UK store closure programme ahead of the original schedule and the product outsourcing initiative underway.

In addition, the creation of a leaner organisational structure, which led to a collective consultation exercise with all employees at head office, was completed in December 2018. Mothercare also said it's on course to deliver cost savings of at least £19m a year in aggregate.

Chief executive officer Mark Newton-Jones said: "We have made significant progress in recent months as we continue our strategic transformation to deliver a sustainable and profitable future for Mothercare.

"This disposal of Early Learning Centre provides a further step towards eliminating our bank debt, and our new concession arrangements with The Entertainer will bring our customers an even stronger Toys offer, both in stores and online. We look forward to working with the team at The Entertainer in the years to come."

Numis said: "The disposal looks to be a sensible step in the transformation of Mothercare, helping reduce bank debt whilst improving the customer offering with little impact to ongoing cash generation."

Shore Capital analyst Clive Black said the update was "another welcome announcement" with respect to Mothercare's ongoing substantial change programme, and the price achieved for ELC is "attractive".

"The proceeds of which will reduce bank debt whilst an ongoing commercial relationship will emerge. More broadly, Mothercare is seeing through a material and notable change programme through Clive Whiley that is fundamentally bolstering the group's financial constitution, which means it should be debt-free in CY2019.

"What this means is that if a more focused Mothercare can engineer stabilisation and onward progress in the UK (in-store & online) with progress-on-progress in its capital light international markets, then a material prize awaits investors. The risk/reward equation is improving to us but there remains more to do. We place the stock on our Positive Watch List reiterating our hold stance for now."

At 1600 GMT, the shares were up 7.1% to 18p.