Daily ShareChat: Pumpkin Patch

By Jenny Ruth

Monday 20th July 2009

Pumpkin Patch's decision to close about 20 of its 35 US stores will increase 2010 and 2011 net profit by about 40%, reflecting the removal of about $11 million in annual operating losses from the US division, says Buffy Gill, an analyst at Goldman Sachs JB Were.

"We now expect the US operations to break even in 2012 due to the remaining stores participating in our expectations for a US consumer recover," Gill says.

As a result, she has raised her discounted cashflow valuation by 18% to $1.95 a share. "On our estimates, Pumpkin Patch appears attractive from a fundamental value standpoint."

The stores the company is closing are generally the newer of their stores which failed to gain traction before the US downturn. "We also suspect these stores were further negatively impacted by limited awareness of the Pumpkin Patch brand in the majority of their locations due to the stores' dispersed positioning across states." The company's stores were in eight different states and after the closures will be confined to California, Washington State and near Washington DC.

The closures transform Pumpkin Patch "into a considerably different investment story," to some extent renewing investor confidence in its management, and serves to de-risk the company, Gill says.

BROKER CALL: Goldman Sachs JB Were rate Pumpkin Patch (NZX: PPL ) as Buy.

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