Pumpkin Patch needs more capital for turnaround, bosses say

Wednesday 30th September 2015

Pumpkin Patch’s new chief executive, Luke Bunt, says further capital will be needed to drive a turnaround in the troubled childrenswear retailer but it’s too early to say how much.

The company reported today it had reached a deal to extend borrowing facilities with its banker, ANZ, in a stepped repayment plan to the end of 2017 after reducing debt by $26 million to $39 million in the past financial year.

It also reported a $9.1 million after tax loss for the year to July 31, a slight improvement on the previous year’s $11.5 million loss but worse than forecast due to bigger-than-expected provisions against under-performing stores.

Bunt, who joined the board last October and became ceo in August, said he had focused on reducing debt and inventory levels, which fell to $41 million from a restated $64.3 million a year earlier.

“The company had placed itself historically under significant pressure with a relatively high level of debt. As any retailer will tell you, it’s difficult to survive in the highly competitive retail environment in New Zealand, which is promotion driven, while carrying a significant amount of fixed debt obligations.”

Market research he’s commissioned showed significant brand loyalty among customers but many have expressed the view to the company and elsewhere that the offering and stores had become dated. Increased competition compared to its glory days had left Pumpkin Patch as more expensive than many of its rivals.

Bunt said the company had continued to trade well in Australia and New Zealand in the past year with same stores sales growth across the Tasman of 6.4 percent and New Zealand sales up just half a per cent on a same store basis. Exchange rate headwinds, restructuring its online offering, and losses in the wholesales business are expected to result in considerably lower earnings before interest, tax and depreciation in the 2016 financial year than this year's $11.7 million Ebitda result,itself down 30.8 percent on the previous year, prior to restructuring costs and prior year restatements.

Former chief executive Di Humphries, who was appointed in 2011 ago to try to turn the company around, resigned earlier this year. Chairman Peter Schuyt said Humphries and her team had managed to reduce debt while improving sales, particularly in Australia.

Schuyt, who took over the chairman’s role from Jane Freeman last October, said the board had a four-step plan to turn around the once trail-blazing kiwi retailer, which was founded in 1990 and listed in 2004. The former market darling came unstuck by incurring too much debt from 2007 under previous management in an unsuccessful foray into the US and UK.

“There is no silver bullet. We have a change programme in place but it won’t be fixed overnight,” Schuyt said.

The first step, where the company is now, has been fully understanding the debt situation and renegotiating its $75 million banking facility, of which the first $25 million tranche was to have come due on Sept. 30, he said.

Last week the company delayed reporting its end of year results after discovering an unanticipated increase in provisioning against the carrying value of capital, a problem that created a technical breach of its banking covenants and required a bank waiver.

Schuyt said the next step is defining the future strategy, working out how much that will cost and what resources it will need, and the final step is then how they will fund it. He said it was too early to say where that capital would be sourced.

Bunt said the immediate strategy was to focus on the core businesses in New Zealand and Australia, seek inventory efficiencies, and revamp product design to meet the market better. He’s just appointed a new head of design and sourcing.

Currently 14 percent of the company’s sales are online and Bunt said while that was on par with many of its competitors, it needed to change from offering discounted promotions to more closely matching the in-store product range and pricing. The company also needed to become more sophisticated in its communications with customers and active on social media, he said.

Bunt said many stores need refurbishing, with 10 percent of its 180 stores in New Zealand and Australia identified as under-performing. He said that won’t necessarily mean closing stores but some need to be relocated.

The company has two remaining stores in Ireland which are due to be closed by June next year.

BusinessDesk.co.nz

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