Children's clothing retailer Pumpkin Patch is closing its remaining 20 stores in the United States, as the company continues to face challenging and volatile trading conditions.
Investors reacted badly to the news with Pumpkin Patch shares (NZX: PPL) down 9.09% to $1.00 in early trading.
It is also developing strategies to enhance overall trading results in Britain with a focus on 17 underperforming stores, while a review of operations at its Auckland head office is expected to result in staff cuts.
Given continued challenging retail conditions, coupled with other factors, 2011 net profit after tax, before reorganisation costs, was expected to be between $12 million and $14 million, Pumpkin Patch said.
In the year to July 2010 the company reported net profit of $25.5m, well above the $14.5m the year before.
In today's announcement, the company said trading conditions across all markets remained challenging and volatile with no indication of material improvement in the near term.
Price rises from suppliers had been "abnormally" high, particularly the cost of cotton, Pumpkin Patch said.
While raw material prices had stabilised, ongoing increases in labour and other manufacturing costs meant it would continue to investigate new suppliers and countries from which to source products.
Also, the start to the winter season had been warmer than normal, and the high New Zealand dollar was having an impact on the value of international sales.
The overall impact on earnings before interest and tax (ebit) of the changes being made by the company was estimated to be between $9m and $11m including employee, lease, and inventory related costs, other miscellaneous administrative and advisory costs, and a non-cash impairment charge on eight British stores.
An ebit charge of between $9m and $11m would be recognised in the current financial year, Pumpkin Patch said.
Between $4m and $5m of the costs would be cash in nature, with most of the cash costs falling in the 2012 financial year as changes were implemented.
In the US store leases were expiring in the next two to three months, and while lease extensions were available the proposed terms would make the US retail operation unsustainable, especially given the poor state of the retail environment in that market, Pumpkin Patch said.
The 20 US stores would cease trading on a staggered basis in the coming six months. It would use short term lease roll-overs where needed, allowing sales opportunities and inventory sell through to be maximised across the store network during the closure process.
Ebit losses from the US retail segment in the 2011 financial year, before reorganisation costs, were forecast to be between $2.4m and $2.9m. The full positive financial impact of the changes on total group earnings would be seen in the second half of the 2012 financial year.
Pumpkin Patch chief executive Maurice Prendergast said the changes announced today would enhance future earnings and cash flow results.
Removal of the losses from the US and Britain, and the lower overhead structure would drive much improved financial results.