Pumpkin Patch raised to 'accumulate' at AspectHuntley

Friday 3rd July 2009

Pumpkin Patch was raised to ‘accumulate’ by Morningstar’s AspectHuntley unit after the children’s clothing chain said it would close most of its US stores, curbing losses and expenditure in a market and bolstering its earnings outlook.

The retailer this week said it will shutter 20 of its 35 US stores, targeting newer outlets that had failed to turn a profit in a shrinking consumer market. It projected a US operating loss of $3 million for the year ending July 2010, less than a quarter of the losses that analysts had forecast.

“A significant reduction in US losses coupled with lower capital expenditure in 2010 and working capital savings should improve group cash flows and lift returns going forward,” analysts at the research firm said.

There is a “distinct possibility” Pumpkin Patch may eventually pull out of the US and UK markets, which could be a catalyst for the stock and make it suitable for “long term investors with a reasonably high appetite for risk.”

Shares of Pumpkin Patch slipped 1.4% to $1.43 today and have soared 59% this year, the best performance on the NZX 50, eclipsing a 52% gain in the shares of NZX. In the same period the NZX 50 is little changed.

Pumpkin Patch’s reorganisation costs, of $36 million to $42 million, will be written off this year and the company expects its level of debt will be at the lower end of the $30 million to $40 million range it forecast with its first-half results.

AspectHuntley lifted its 2010 forecast for net profit to $25.3 million from $18 million on the prospects of reduced losses from the US. It said then retailer’s management was less concerned with the performance of its UK stores, with most performing satisfactorily.

Growth opportunities are attractive in Australia, its largest market, while the market in New Zealand is “steady but mature,” the firm said.

Its fair value estimate for Pumpkin Patch stock is $1.62 based on a 10% discount to its discounted cash flow valuation, it said.

Businesswire.co.nz

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