Pumpkin Patch readies for tougher times

A fall in profits for Pumpkin Patch a few years ago would have been met with a quick flurry in share sales – but not in today’s market where any profit at all is a much more highly valued achievement.

The number of fire sales and liquidations has left no one in any doubt that the retail sector is in difficulty so investors at Pumpkin Patch can be pleased (or at the least relieved) with its modest $9.5 million net profit.

But if that’s not worth cheering over; the company’s 60% reduction to $32.4 in debt due mainly to the restructuring of its foreign exchange portfolio is. As is the considerable reduction in the company’s inventory.

And then there are the wholesales and direct divisions – shiny stars in the otherwise average profit report card.

Ebit in these divisions is up a whopping 28.5% to $7.8 million and chief executive director Maurice Prendergast says the order book is fairly full for the next six-months.

But he does add that they believe it is only going to get tougher as they go through.

There may be a few bright spots on the balance books but things are still not rosy for operations in the UK and particularly the US and it seems to have been a case of expanding quickly into a terrible market.

It could be argued that since the US operations haven’t posted a profit and as the economy is getting worse rather than better it might be time to cut losses, close stores and continue the assault on the US market through their wholesale operations.

However, Pumpkin Patch’s board is committed to its US stores, prepared to spend more time up there getting the strategy right and argue that its move into the market is “credible.”

Granted wholesale operations have done well in the US and Mr Prendergast says that it is not the amount people are buying but the numbers actually coming through the door.

The impact of redundancies in the US stores has yet to be seen on the bottom line,  add to this to the impact of a weak kiwi dollar and reduced quota costs and there is some hope.

The company’s UK operation is still finding profit elusive as well. However, its main competitor Adam’s Kids has gone into receivership not once but twice in the last six months, which proves just how hard the market is at the moment.

Pumpkin Patch is forecasting increased losses there as this is typically a slower retail period and that is without taking into account the dire trading conditions there at the moment.

At least business in Australia and New Zealand continue to show profit – Australian retail stores ebit was down just 5.4% to $19.5 million and New Zealand’s down 11.8% to $6 million.

But analysts are predicting trading conditions here and in Australia to deteriorate and this will start to affect the full-year results.

Yet even though there are concerns in the US and UK markets investors seem to be happy that Pumpkin Patch has done everything they can to meet the challenges of an increasingly volatile global market.

This has been reflected in a rocketing share price – prices were the highest they have been in the last month and nearly managed to breach the $1 mark.

The company began a share buy back scheme in November last year after share prices dropped to 79c – while short-term it boosted the price back above the $1 mark prices had been falling as sentiment about the retail sector has grown increasingly worried.

Comments from Pumpkin Patch probably haven’t assured industry watchers too much especially as Mr Prendergast admitted that as he wrote about the company’s outlook he kept thinking “who really knows.”

While Pumpkin Patch results could be seen to foreshadow better than expected or flat results for other retailers especially those with large interests in Australia it needs to be remembered that Pumpkin Patch differs because of what it sells.

First it sells children’s clothes – the perfect gift from practical relatives. Second, children will grow out of clothes, they will wear them out and they will need to don something so while someone might put off buying a new diamond ring from Michael Hill  or a vase from Briscoes chances are they will buy their child a new jumper.

So Pumpkin Patch’s board is just going to have to hope they buy it from them.

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