1. INTRODUCTION

Mothercare group comprises of two retail brands internationally: Mothercare and Early Learning Centre. “Their mission is to meet the needs and aspirations of parents for their children, worldwide” (Mothercare, 2009). “In the UK, like-for-like sales in the 15 weeks to 10 July increased 5.1% despite the recession, up from last year's 1.4% rise.” (BBC News, 16 July 2009).

This report analyses the financial position and performance of the company for the year 2009. It contains the key performance indicators in 2009 compared to 2008. Some financial and non-financial information are described in detail from the Chairman’s statement. The performance is elucidated based on the calculation of financial ratios from the values taken from financial statements (income statement, balance sheet and cash flow statement) in annual report. Then there is a brief description of Corporate Governance dealing with the definition, principles and some details about the board of directors and audit committee (responsibility and structure) from the annual report and website.

Page 1 of 8

2. KEY PERFORMANCE INDICATORS SUMMARY OF PERFORMANCE

The key performance indicators as mentioned in the annual report of Mothercare plc 2009 are shown below.

2.1 Financial information:-

Group sales increased by 6.9% to £723.6m in comparison to a value of £676.8m in 2008. This is good news for shareholders, employees, government, suppliers and investors.International franchisee retail sales increased by 40.9% to £404.2m. Direct-in-home sales increased by 24.9%, this might have happened because people prefer less travel.Group profit before taxation rose to £42.2m compared to a loss of £2.6m in 2008. This might be because of the rise in price of shares and opening of more stores worldwide.Year end cash balance increased by 9.3% to £24.8m. This is good news for the owners. Total Dividend increased by 20.8% to 14.5p. Good news for shareholders.Underlying basic earnings per share increased by 12.6% to 32.1p. Liquidity in company will increase.Direct in store sales increased by 26.3% to £45.1m. Good news for investors.Sales breakdown – in UK, Mothercare gets revenue of £578.8m and internationally it gets £144.8m from sales. This is bad news for the company, and may be because of improper functioning of franchise internationally.

2.2 Non-financial information:-

Total stores are 1,014 in 51 countries. Good news for customers as well as investors and shareholders.Number of stores in UK has decreased from 425 to 405 and number of international stores has increased from 494 to 609 from 2008 to 2009.115 new international franchise stores added in 2009.2 new countries added in 2009.UK product breakdown: Clothing – 28%, Home and Travel – 36%, Toys and Gifts – 36%. Good news for owners because they had acquired ELC which deals with toys mainly, and business is performing well.

Page 2 of 8

3. NARRATIVE SECTIONS IN ANNUAL REPORT AND WEBSITE

3.1 Chairman’s Statement

3.2 Financial Information:-

The internet business in UK has exceeded £100m and represents 18.5% of total UK sales. The size of some stores have been changed to make them more profitable, converted 25 stores to 2 in 1 by closing 38 stores. This has reduced the occupancy cost by 10.4%. Despite of acquiring ELC in 2007 for £85m, they are debt free and easily generating operational cash flow.

It is good news for investors and shareholders since they are expanding business inspite of closing some stores. Being debt free, investors would like to invest more, thereby bringing revenue to company.

3.3 Non-financial Information:-

The Chairman concentrates on the future aspirations. Mothercare and ELC is now operating in 51 countries with 609 stores outside UK, which includes 40 stores in Greece and 50 in Saudi Arabia with long and strong franchise relationships. The international sale and business will eventually increase even more than that in UK. An entry into China with a different pattern of business has produced good result. They will engage in more joint ventures in future. They are planning for direct business internationally in 2009/10. They also have a joint venture in a social networking site named Gurgle.com with about 91,000 users in UK and some in USA and India. The design in few stores will be changed in future to delight the future customers.

This information is of great interest for government of different countries, customers worldwide, and shareholders and also for customers who order their products from home, in terms of tax generation, brand expansion and better quality promise respectively.

3.4 Website:-

Mothercare is highly customer focused. New autumn collection has arrived in the stores. Heavy discounts and offers have been announced on various items. Catalogues for Christmas are out at stores and available online also. International delivery details are given in website. All departmental details along with their catalogue number are available on the website. It is helpful for customers willing to order any product online and to get proper details of products before going into any store to buy anything. For customers’ comfort, customer service assistant details are also mentioned online.

Page 3 of 8

This information will help in increasing the sales revenue for the year 2010. And hence make more profit from business.4. COMPANY’S PERFORMANCE USING FINANCIAL RATIOS

Financial ratios provide a quick and simple method of assessing financial health (position and performance) of the business. They are classified into five categories. (Atrill and McLaney, 2008)

Table 1: - Financial Ratios for Mothercare plc

Mothercare plc - Financial ratiosSl. No. Ratios 2009 2008

Profitability Ratios1 Return on Capital Employed (ROCE) 16.82% 1.91%2 Operating Profit Margin 5.98% 0.65%3 Gross Profit Margin 12.02% 9.50%

Efficiency Ratios4 Average Inventories turnover period 54 days 42.2 days5 Average settlement period for Trade Receivables 28.1 days 28.3 days6 Average settlement period for Trade Payables 62.2 days 57 days

Liquidity Ratios7 Current Ratio 1.48 : 1 1.23 : 18 Acid Test Ratio 0.71 : 1 0.64 : 19 Cash generated from operations to current liabilities 0.33 : 1 0.46 : 1

Financial Gearing Ratio10 Gearing Ratio 22.84% 14%

Investment Ratios11 Dividend Cover Ratio 2.78 : 1 0.01 : 1

Page 4 of 8

4.1 Profitability Ratios: -

These provide the degree of success in making profit for the business. A higher value of the ratios is always preferred (Atrill and McLaney, 2008). To check the performance of the business, the following ratios were taken.

Return on capital employed (ROCE): It is the most fundamental ratio to measure the business’ performance. It is the relation between operating profit and capital and long term liabilities.

Operating Profit Margin ratio: It is the relation between operating profit to the sales revenue for a period.

Gross Profit Margin ratio: It is the relation between gross profit and the sales revenue for a period.

The ROCE increased drastically from 1.91% to 16.82% and operating profit margin also increased from 0.65% to 5.98% because of higher operating profit in 2009 with almost same equity and sales compared to 2008. In 2008, the company’s profit from retail operations was less and loss on property interests was more, because of which its operating profit was less. The gross profit margin also increased from 9.5% to 12.02%, because of higher sales in 2009 compared to 2008. Hence business is doing well.

4.2 Efficiency Ratios: -

These are used to study the ways in which different resources are being used in business and managed (Atrill and McLaney, 2008). To check the performance, the following ratios were taken: -

Average inventories turnover period: It gives the measure of the average period for which the inventories were held. Less number of days in preferred. The number of days in 2009 has increased by 12 days to 54 days when compared to 42 days in 2008. But this will not affect the business because the group sales as well as international sales have increased by 40%. Moreover, the number of stores internationally has also increased to 609. So, increase in inventories is must.

Average settlement period for trade receivables: It shows the number of days, customers take to pay the credited amount. Less number of days is preferred. The number of days is same for both the years. Hence no effect on business due to this ratio.

Average settlement period for trade payables: It shows the number of days, the business takes to clear its debts. More number of days is preferred. Number of days has increased from 57 to 62 days. Thus, company can keep the cash for longer period and invest somewhere else to get good return on investment.

Page 5 of 8

4.3 Liquidity Ratio: -

These ratios give the information about the ability of the business to meet its short-term business needs (Atrill and McLaney, 2008). All the ratios are taken to check the performance of the business.

Current Ratio: It compares the liquid assets (which can be converted to cash) to the current liabilities. Ideal value is 2:1.

Acid Test Ratio: Sometimes it is not possible to convert the inventories into cash very soon. So we calculate a ratio comparing the current assets apart from the inventories to the current liabilities. Ideal value is 1:1.

Cash generated from operations to current liabilities: It is the comparison of cash generated from operating activities to the current liabilities.

From the calculations of current ratio (1.48:1), the business is having enough

cash for running smoothly. From acid test ratio, the value is quite below 1:1 (ideal value), i.e. 0.71:1 in 2009. But it is not an issue for the business, because there is enough inventories to meet the requirement of the increased stores worldwide. The main issue that arises from cash generated from operating activities to current liabilities is that the value has reduced from 0.46:1 to 0.33:1. This has happened due to increase in inventories. But it should be kept in mind, since further decline may cause problems in running the business smoothly.

4.4 Gearing Ratio: -

It measures the contribution which is made by financing the business to the contribution from the capital inclusive. A higher value involves higher risk to the business (Atrill and McLaney, 2008). From the calculations we find that the gearing ratio has increased from 14% in 2008 to 22.84% in 2009. It is seen that the long term liabilities have increased because of the retirement benefit paid by the company in 2009. But as the business is very big and expanding internationally, this value of gearing ratio can be considerable. But Mothercare should focus on this part of their business.

4.5 Investment Ratio: -

Dividend cover ratio: It tells us how a business can pay its dividend from its profits. The higher the cover, the better the ability to maintain dividends even if profit drops (Atrill and McLaney, 2008). The cover has increased drastically in 2009 to 2.78 times than 0.01 times in 2008. This is also good news for shareholders, directors and the business.

Page 6 of 8

5. CORPORATE GOVERNANCE

“Corporate Governance is a term used to describe the ways in which companies are directed and controlled.” (Atrill and McLaney, 2008) It is used to reduce any conflicts between shareholders and directors. There is always a risk that directors spend their time in achieving their own interests rather than that of shareholders.

It is based on three rules: -

1. Disclosure: - Proper and timely information about performance to investors.2. Accountability: - Defining roles of directors, creating a proper monitoring process.3. Fairness: - Preventing from access to internal data by directors.

The board consists of a part-time chairman, two full-time executive directors (Chief Executive and Finance Director) and four independent non-executive directors. “Directors are subject to re-election by shareholders every three years. The board is run on a unitary basis.” (www.mothercareplc.com). All the members of the board are highly qualified and capable of taking decisions for the development of the company. The main objective of the board’s responsibility is to monitor and review the effectiveness of the company’s financial, operational, compliance and risk control policies and procedures for reporting the financial performance and key performance indicators on a regular basis. The board meets regularly to discuss on “setting the group strategy, approval of the annual budget and financial statements, major acquisitions and disposals, authority limits for capital and other expenditure and material treasury matters.” During the year 2008-09, seven meetings were held by the board. There were two ad hoc meetings also, which approved the interim and full year accounts and report. (Mothercare Annual Report, 2009)

The key board committees are Audit, Remuneration and Nomination committee. The audit committee met four times during the year. It advices the board about the duties regarding the company’s financial statements and maintain proper financial records and controls. A meeting was held to approve the half-year and full-year accounts. Two meetings were held to consider the accounting policies, governance and matters related to Internal Control and Management (Mothercare Annual Report, 2009).

The information is useful for shareholders, so that their money is not cheated by the company and they get full information of what is being done with the fund in the company.

Page 7 of 8

6. Conclusion

From the annual report and going through the financial statements, it is concluded that Mothercare plc has done good profit in 2009 compared to 2008. It has been successful in expanding its chain of stores worldwide and increased sales drastically.

7. BIBLIOGRAPHY

Atrill, P. and McLaney, E. (2008) Accounting and Finance for Non-specialists, Prentice Hall, 6th Edition.

Atrill, P. and McLaney, E. (2008) Financial Accounting for Decision Makers, Prentice Hall, 5th Edition.

Annual Report, Mothercare, 2009.

7.1 Web references

BBC News, 16 July 2009. www.news.bbc.co.uk

Sunday Times, 8 March 2009 www.business.timesonline.co.uk

www.mothercare.com accessed 18 October 2009

www.mothercareplc.com accessed 19 October 2009

Page 8 of 8