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Fundamental Analysis of Mothercare plc
Executive Summary


Mothercare plc is a company incorporated in the United Kingdom which provides
specialized retail services of products for prospective mothers, babies and children who
have attained a maximum age of eight years



The company sales revenues have been growing at an average rate of 5% and will
continue to grow at this rate going forward
...




Mothercare profitability is weak as compared to its competitors and has been declining
over time save for 2009
...




In comparison to Marks and Spencer plc, Mothercare plc has much lower profitability
ratios
...




The overall financial risk of Mothercare plc in lower than that of its competitor and it has
generally reduced over time
...
There is increased demand for toys and games
across the world and therefore the market will expand in the future
...


Introduction
Mothercare plc is a company incorporated in the United Kingdom which provides specialized
retail services of products for prospective mothers, babies and children who have attained a
maximum age of eight years
...
Mothercare plc was initially founded as retail store stocking pushchairs, nursery
furniture and maternity clothing
...
Mothercare plc currently offer an extensive array of children and
maternity apparel, fixtures and home equipment, comforters/beddings, feeding, bathing, travel
equipment and toys mostly in its retail chain in the United Kingdom
...

Mothercare plc is composed of two principal retail brands which have international presence, i
...

Mothercare and Early Learning Centre
...
The company’s mail order
business commenced in 1962, and the company became a public limited company in 1972
...
Again, the company merged with British Home
Stores plc in 1986
...
Mothercare plc acquired Chelsea Stores Holding
Limited in 2007, effectively taking ownership of Early Learning Center, which was then a fully
owned subsidiary of Chelsea Stores Holding Limited
...
The efficient market hypothesis suggests that stock market
prices will reflect all the available financial information (Pandey 2004)
...

Fundamental Analysis
Stock market analysis is widely dived into two categories, i
...
technical analysis (heavily relies
on historical data to make stock market predictions about future movement in stock price), and
fundamental analysis (uses past and present data to make predictions of future movement in
share prices)
...
10)
...
Fundamental analysis might
be either horizontal, vertical, ratio, comparative or strategic analysis
...
83)
...

Sales Performance
Sales revenue is the most important aspect of a company’s financial performance
...

3

Therefore, the future performance, sustainability and survival of the company are largely hinged
on its ability to generate sales
...
The table below shows the various sales
figures and annual change of Mothercare plc over the last five years (Mothercare 2006; 2007;
2008; 2009; 2010)
Sales Performance (Figures in £ million except for change)
%
2006 % change

2007

482
...
5

3%

%

change
36%

2008 % change

2009 change

2010

676
...
6

766
...
This sales revenue has been earned consistently from its
Mothercare brand
...
5 million pounds in sales revenue being a
3 per cent increase from the 482
...
The sales
figure recorded a very steep rise in 2008 to 676
...

The growth in 2008 was majorly as a result of the successful acquisition of the Early Learning
Center from the Chelsea Stores Holdings limited
...
In conclusion, the company sales revenues have
been growing at an average rate of 5% and will continue to grow at this rate going forward
...


4

Profitability
The primary objective of financial management is the maximization of shareholders wealth as
reflected in the company share price
...
The accounting profit
represents a return on a capital committed in a business enterprise (Gilkar 2008)
...
The following is a profitability analysis of the Mothercare plc
alongside its competitor Marks and Spencer plc for the last five years
...

Net Income (figures in £ million except for
change)
%

%

%

2006 change

2007 change

17
...
5

%

2008 change

2009 change

2010

30
...
6

508

4%

526
...
1 30200%

Marks and
Spencer plc

523
...
9

25% 821
...
Mothercare plc net income in 2007 was £ 14
...
5 million)
...
The declined was largely attributed to
increased operational cost and huge investment in working capital brought about by the
Mothercare plc’s investment in Chelsea Stores Holdings limited coupled by lower demand
occasioned by the 2008 global economic recession
...
The growth was as result of increased volume
and improved cost control resulting from the corporate acquisition in 2007
...

In conclusion, Mothercare profitability is weak as compared to its competitors and has been
declining over time save for 2009
...

Profitability ratios
Profitability ratios are used to evaluate a company’s ability to generate earnings on the
background of resources used or revenue generated
...
452)
...

Mothercare Profitability Ratios (figure in %)1
2006
2007
2008
2009
1

2010

Adapted from: Global Data 2010, ‘Mothercare plc- Financial Strategic Analysis Review’, [Online]

Available at ...
com/Financial data
...
54
4
...
63
11
...
01
13
...
28
8
...
6
36
...
61
3
...
91
10
...
79
9
...
4
6
...
64
23
...
5
0
...
01
10
...
66
0
...
92
0
...
17
16
...
02
5
...
19
13
...
83
15
...
5
7
...
32
73
...
35
4
...
08
12
...
24
12
...
79
5
...
79
46
...

The gross margin declined again in 2010 relative to 2009
...
Similarly, the return on capital employed
for the company declined over time since 2006, an increase only being witnessed in 2009
...

The gross profit margin, the operating profit margin, profit before tax and net profit margin
indicates how much profit a company earns per unit of sales revenue generated (Gibson 2008, p
...
Gross profit margin considers profit after cost of sales, operating profit considers profit
after all other operating expenses, profit before tax looks at earnings before tax but after interest,
while net income margin considers profit earned on sales after deducting interest and tax
...
Increased competition based on price
and declining consumer demand especially in Europe have largely contributed to the declining
profit margins
...
Return on equity represents
the profit earned on the capital provided by ordinary stockholders; return on assets indicates the
amount of return earned on every unit of asset put into operation; while return on capital
employed shows the how much profit is earned on the total capital employed into the operation
of the business, i
...
both the shareholders equity and the long-term debt
...

The table below shows profitability ratios of Marks and Spencer plc one of the major competitor
of Mothercare plc
...
29
38
...
65
37
...
9
11
...
43
9
...
71
7
...
11
5
...
04
63
...
99
59
...
56
10
...
51
7
...
46
40
...
99
24
...
22
26
...
42
17
...
95
12
...
47
7
20
...
39
20
...
84

2010
37
...
93
5
...
37
24
...
19
7
...
13

Adapted from: Global Data 2010, ‘Marks and Spencer plc- Financial Strategic Analysis Review’,

[Online] Available at ...
com/Financial data
...

Therefore, the company is less profitably as compared to its peers in the industry
...
As
indicated earlier, the fall in industry profitability is a direct result of price based completion
(price wars) and reduced demand brought about by the world economic recession witnessed in
the last five years
...
This paints a bleak future on the industries future profitability and therefore increases
the investment risk in the company
...

In essence, Mothercare is not the best investment option in industry
...

Cost Control
The control of cost is the most essential component of sustainability management in business
enterprises
...
Cost efficiency
means that a firm should be able to operate at minimum costs level as before
...


Operating Cost (% of Sales)
9

2006

2007

2008

2009

2010

Mothercare plc3

95
...
53

99
...
15

95
...
1

88
...
57

90
...
17

Mothercare plc has very high operating costs compared to the sales volume
...
In addition, Mothercare plc has higher
operating costs compared to its competitor Marks and Spencer plc
...
The level of operating costs has increased steadily between 2006 and
2007, rising sharply in 2008 as a result of the acquisition and restructuring of the Chelsea Stores
Holdings limited in 2007
...
The
operating cost again rises above the 2009 level in 2010
...

Administrative Cost (% of Sales)5
2006
Mothercare plc

2007

2008

2009

2010

6
...
76

5
...
69

6
...
04

24
...
6

24
...
2

Mothercare administrative costs as a percentage of sales have declined between 2006 and 2008
and then begun to rise as from 2009 to 2010
...
In essence, the company has a much more efficient administrative structure
...

Operationally, Mothercare plc is cost inefficient as compared to its competitor and the company
has grown more inefficient over the last five years
...
As a matter of fact, operating costs have a direct impact
of profitability
...

Financial Risk
Financial risk is the likelihood that a company might not meet its financial obligation as they fall
due
...
The likely hood of failing to meet short-term
financial obligation is referred to as the liquidity risk while solvency risk is the likelihoods that
the company may fail to meet its long-term financial obligations (Allen 2003)
...
The liquidity ratios of Mothercare plc as presented in
the table below
...
12

2
...
22

1
...
54

Quick Ratio

1
...
36

0
...
7

0
...
64

0
...
19

0
...
29

The current ratio indicates the amount of current assets a company holds relative to the current
liabilities
...
The cash ratio
considers only very liquid assets like cash and marketable securities
...

The trend in liquidity position indicates it will continue to grow into the near future
...

Solvency analysis
Another form of financial risk is the likelihood of solvency
...
The
solvency ratios of Mothercare plc are presented in the table below
...
76

9
...
25

0
...
6

8
...
22

0
...
On the other hand, debt to capital indicates how
much debt the company has used financing its operations
...
As a matter of fact, the ratios are much lower than that of Marks and Spencer
...

The overall financial risk of Mothercare plc in lower than that of its competitor and it has
generally reduced over time
...
It summarizes
environmental variable into four distinct classes, i
...
Strength, Weaknesses, Opportunities, and
Threats (Bohm 2009)
...

Strength
The Company has a strong product portfolio with a wide range of maternity and children
apparel, fixtures and home furniture, beddings, feeding and travel equipment which give the
company competitive advantage
...

Finally, Mothercare has a much better liquidity position as compared to its competitors in the
industry
...
Secondly, the company has been be delved with product recalls
in 2009 which causes a major operational concern
...

Finally the company’s revenue is concentrated in the United Kingdom making it vulnerable to
market volatility in the UK
...
For example it entered into a
strategic partnership with Boots to design, store and supply children apparel in the UK and
Ireland
...
The
strategic alliances have the potential of improving the company’s product portfolio and changes
of entry into new markets
...
Finally, the is a huge
potential in emerging markets such as Brazil, China, Russia and Taiwan which have recorded
very high GDP growth figures
...
Secondly, there is a
very fierce competition in the industry which easily crowd out profits
...
The company will obviously grow sales as
the industry grows
...
considering the growth potential of the industry, the company profitability
is expected to grow if the management will put much effort in cost control and efficiency
management
...


15

Bibliography
Allen, S 2003, Financial Risk Management, New Jersey: John Wiley & Sons
Gibson, C
...
A 2008, Profitability Analysis, New Delhi: Atlantic Publishers
Global Data 2010, ‘Marks and Spencer plc- Financial Strategic Analysis Review’, [Online]
Available at ...
com/Financial data
...
onesource
...
asex> Accessed on 2nd February, 2011
Mothercare plc 2006, ‘Annual Report’, [Online] Available at
...
com/download/ar_2006
...
mothercareplc
...
pdf> Accessed on 2nd February,
2011
Mothercare plc 2008, ‘Annual Report’, [Online] Available at
...
com/download/ar_2008
...
mothercareplc
...
pdf> Accessed on 2nd February,
2011
Mothercare plc 2010, ‘Annual Report’, [Online] Available at
...
com/download/ar_2010
...
mothercareplc
...
M 2004, Financial Management, New Delhi: Vikas
Schlichting, T 2008, Fundamental Analysis, Behavioral Finance and Technical Analysis, Berlin:
GRIN Verlag
Sincere, M 2004, Understanding Stocks, New York: McGraw-Hill Publishers

17



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Title: Company analysis: Mothercare fundamental analysis
Description: Stock market analysis is widely dived into two categories, i.e. technical analysis (heavily relies on historical data to make stock market predictions about future movement in stock price), and fundamental analysis (uses past and present data to make predictions of future movement in share prices). Fundamental analysis holds that the value of the company (value of its stock prices) is driven by fluctuations around its intrinsic value (Schlichting 2009, p. 10). In this sense, the intrinsic value is the fair value of the company and is determined by analyzing the extend to which fundamental factors have affected the value of the company. Fundamental analysis might be either horizontal, vertical, ratio, comparative or strategic analysis. The analysis in most cases will relate to associations among the various elements of the financial statements (Sincere 2003, p. 83). The following analysis is a fundamental analysis of Mothercare plc.

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