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Pumpkin Patch loss widens as sales slide, debt mounts

Thursday 29th September 2016

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Pumpkin Patch's annual loss widened by 71 percent as the indebted children and babywear retailer's revenue sank with store closures and as its international wholesale business struggled. 

The Auckland-based company posted a net loss of $15.5 million in the 12 months ended July 31 from $9 million a year earlier, it said in a statement. Revenues dropped 11 percent to $212.4 million, and adjusted earnings before interest, taxation, amortisation and depreciation fell 71 percent to $3.4 million, at the top end of guidance. 

The directors said the 2016 financial year was the first in a four-year turnaround plan, and "very good progress has been achieved, although this is not immediately apparent from the headline numbers reported." The decline in sales was put down to the fall in its international wholesale business and online channels in the northern hemisphere, which have historically delivered profits. 

The directors warned that the business remains over-leveraged and capital constrained, with "our ability to move forward impacted by the lack of available capital for debt reduction and reinvestment." The board's primary focus is described as assessing what options are "realistically available" to address its position, and the company will give earnings guidance with its first-half results, following the Christmas trading period.

Pumpkin Patch's problems are highlighted at the end of the accounts by auditors PwC, who say that if the group is unable to address its capital constraints and comply with bank covenants, "this indicates the existence of material uncertainties that may cast significant doubt over the group's ability to continue as a going concern."

Its debt to lender ANZ Bank New Zealand rose to $46 million from $39.1 million. The directors have given an undertaking to the bank that it will propose measures to address its capital constraints by Oct. 20. Pumpkin Patch's capital constraints are also highlighted as a "material risk" to the ongoing viability of the business.

A new agreement was signed with ANZ on Sept. 22. This reduces the total facility available to the group to $57 million from $60 million. Its weighted average interest rate fell to 4.22 percent from 5.09 percent. 

The full year accounts show Pumpkin Patch breached banking covenants relating to working capital at the start of 2016. A waiver was sought and obtained from ANZ. Unused lines of credit also declined, falling to $18 million from $25 million. 

The retailer's operations generated a cash outflow of $4.75 million in the year, having reported a positive cash flow of $29.6 million in 2015. Trade working capital fell to $27.5 million from $29.6 million. 

Capital expenditure was $4 million for the year, invested in store refurbishments, technology, and infrastructure. The accounts show the retailer ended the year in its overdraft, with a negative balance of $1 million compared to cash at bank of $1.6 million the year earlier. 

The high value of the New Zealand dollar was also an issue, with about 70 percent of Pumpkin Patch's revenues derived from Australia, but exchange rates remain "well above the long-run average historically", the company said. This was also labelled as a material risk to earnings. 

In June 2016, staff moved from what is termed "excess office space" at 433 East Tamaki Road, with the lease, that runs until 2023, now listed as "onerous". The provision for onerous leases at stores and offices has risen to $3.9 million from $1.7 million. 

Pumpkin Patch closed 12 unprofitable stores in the year, mainly in Australia, and expects more closures over the next two to three years. Sales at stores that haven't been closed in Australia grew by 3 percent. They were flat in New Zealand.

It now plans to shift its method of selling to customers to online, both direct to customers and through third-parties. Online sales rose 22 percent in Australia and 5.2 percent in New Zealand. 

The retailer also set out its new international plans. It's established a new franchise partnership in the Middle East which will see it regain space in six malls in the Middle East, and has agreed to a new relationship with a department store that operates in England, Scotland and Wales. 

While Pumpkin Patch plans to maintain an online presence in the UK, it is evaluating the cost of maintaining standalone websites in Ireland and the United States. 

The shares dropped 8.9 percent to 8.2 cents today and are down 25 percent this year.

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