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Daily ShareChat: Pumpkin Patch

By Jenny Ruth

Friday 29th October 2010

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 Jenny Ruth

Pumpkin Patch's gross profit margin increased significantly in the year ended July to 61.4% of sales from 57.5% the previous year and it also booked a significant $17.1 million hedging gain relating to foreign exchange restructuring the previous year.

“As a result, a number of questions have arisen around this transaction and the subsequent effects” on Pumpkin Patch's profits and balance sheet, says Buffy Gill, an analyst at Goldman Sachs JB Were.

 

“Our analysis suggests that, because Pumpkin Patch re-layered in new contracts at the time of the restructure, there is no go forward distortion of either COGS (cost of goods sold) or gross margin,” Gill says.

If Pumpkin Patch hadn't re-layered new contracts, Gill estimates it would have received a $15.6 million benefit to COGS in the 2010 financial year. “This was, however, not the case as it would have been contra to Pumpkin Patch's hedging policy,” she says.

“The only financial benefits of the transaction were the initial reduction in Pumpkin Patch's debt of $25.3 million and subsequent savings in interest costs. We estimate a total net benefit over the three years of $1.7 million.”

Gill says any positive catalysts for the stock over the next six months are unlikely to be radical with any recovery in Australia offset by continued subdued trading across the rest of Pumpkin Patch's markets.

 

Recommendation: hold.



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