Analysis: Why did Mothercare Australia fall into administration?

The Australian arm was placed into administration after buyout talks with Myer Family Holdings ended inconclusively.

Despite a statement from Mothercare saying that the administration would cause “no significant change to the financial position of the company”, it will no doubt have implications for its UK parent, which owns a 23% stake in the business.

Mothercare Australia operates 49 stores in Australia and New Zealand under the Mothercare and ELC banners. The first ELC stores in Australia opened in 2006, with Mothercare outlets introduced in 2010 as part of a franchise owned by the Headline Group.

The Headline Group also acquired the Baby Galore brand in Australia and began converting stores to the Mothercare fascia. With a strong focus on expansion the store base grew rapidly, to reach around 29 Mothercare and 19 Early Learning Centre stores in Australia and New Zealand over a short space of time.

The most recent results available for Mothercare in Australia show encouraging sales growth of 7.2% for its second quarter ended December 2011 and like-for-like increases of 3.1%. However, heavy investment in expansion and new stores appears to have taken its toll.

Mothercare Australia appeared to be saved, however, when the Myer Group said that it would subscribe for a note of Aus$500,000 to provide the parent and baby retailer with working capital in October. This now appears to have fallen through, according to a Mothercare statement due to “the deterioration of trading conditions”. Although the Australian market appears relatively resilient, with GDP growth of 3.3% last year and 3% forecast for 2013, consumer spending remains cautious amid the worldwide economic downturn.

The moral of the story for Mothercare is to keep tight control of the pace of expansion of its international operations, which have largely been credited with keeping the retailer trading despite its UK difficulties.