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Daily ShareChat: Pumpkin Patch

By Jenny Ruth

Monday 17th May 2010

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Pumpkin Patch's strategy to launch a new brand of cheaper children's clothing looks compelling but the chances of its economic success is too uncertain to factor it into his valuation, says ASB Securities analyst Florian Burch.

Calling it "Spud Plot" until the actual name is made public, Burch says management sees this development as a simple bolt-on to its existing activities and supply chain infrastructure which will make it relatively simple, low cost and low risk to implement.

"If successful, it would allow Pumpkin Patch to participate in a big portion of the market that the company does not currently serve ($2.2 billion to $2.3 billion versus $0.7 billion to $0.8 billion currently) add more growth over the relatively fixed corporate cost base and derive greater economies of scale from the supply chain," he says.

"Strategically, this venture looks like a good move," he says. "The upfront investment is modest relative to the company's earnings, the downside in the event of failure in the trial stage is limited," Burch says.

"Given the limited information available, it is less clear whether the concept can be implemented profitably for shareholders."

The greatest risk is the company rolls out too many stores and becomes tied in to long-term lease commitments before the concept proves it can deliver an adequate return, he says.

Investment rating: outperform.

Daily ShareChat articles report how the main experts in the market might view a certain share and we provide this commentary as a useful resource for investors. Content on this site does not in any way constitute a recommendation to buy, hold or sell any particular share. Investors should always seek professional advice before making any investment decisions.

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