Pumpkin Patch sees lift in below-average financial ratios after review, won’t seek more capital
Pumpkin Patch [NZX: PPL], which slashed its full-year earnings forecast by as much as 88 percent last month, said a strategic review will lead to an improvement in below-average financial ratios and the children's clothing retailer won’t need to seek more capital.
The Auckland-based company’s fixed charge cover ratio (FCCR), which measures its ability to pay fixed costs such as building leases and bank interest out of earnings, may fall to 1 times in 2014, given the slump in earnings, from 1.2 times in 2013, according to Reuters estimates. The benchmark for retailers is about 2 times, according to financial analysts.
Pumpkin Patch last month cut its guidance for after-tax earnings before reorganisation costs to a range of $1 million and $3 million for the year ending July 31, having earlier said earnings would be little changed from last year’s $8.5 million.
According to its annual report, Pumpkin Patch had rental and operating lease expenses of $49.9 million and finance costs of $3.8 million in 2013. It had 2013 earnings before interest and tax of $12 million, according to Reuters. In the first-half of 2014 the company had operating lease expenses of $25.9 million and interest costs of about $2 million, which would amount to $55.8 million on an annual basis. Reuters data shows analysts expect Ebit of $6 million for the year.
Children’s clothing stores are struggling along with the broader rag trade in the face of online competition, discounting and soft demand in Australia and New Zealand, which forced rival retailer JK Kids to close last year, while clothing chain Postie Plus this week appointed administrators after lenders withdrew support.
Pumpkin Patch, which announced a strategic review in March to try to revive its performance, has shed 56 percent of its market value in the past 12 months, the third-worst performance in the NZX’s All Ordinaries Index. The company last paid a dividend in the first half of its 2011 financial year.
“Indications are that the changes required across the business will not require any capital raising to be undertaken or additional debt facilities taken on,” chief financial officer Matthew Washington said in an email. Pumpkin Patch expects to update shareholders on the review in coming months.
“Any changes required across the business are expected to be funded from existing cash flows and the improved earnings/ working capital positions/ cash flows that will come from those changes," Washington said.
The company also expects to constrain costs and improve its FCCR through what it calls its “longer-term omni-channel strategies” which would include “online and international franchise type business models” that generate lower fixed charges. The company's financial ratio has been lower than other New Zealand focused retailers because its stores in Australia have higher fixed charges and because of recent tougher trading conditions, Washington said.
Shares in Pumpkin Patch last traded at 48 cents.The stock is rated an average "hold", according to analyst recommendations compiled by Reuters, with a median 12-month price target of 58 cents.