Pumpkin Patch turns to a loss in 2014, says benefits of changes will come in 2016

Pumpkin Patch, the second-worst performing stock on the NZX All Index the past 12 months, turned to a loss in 2014 and signalled earnings are unlikely to improve for another year.

The Auckland-based children’s clothing chain posted a loss of $10.2 million, or 6 cents a share, in the 12 months ended July 31, from a profit of $5.1 million, or 3 cents, a year earlier. Pumpkin Patch shares, which have slumped 57 percent the past year, were unchanged at 43 cents after the company said annual profit excluding reorganisation costs was $1.2 million, in line with its forecast of $1 million to $2 million.

Pumpkin Patch, which suffered a series of setbacks last year including disruptions to its supply chain as increased rivalry drove down prices, has embarked on a two-year “transformation process” in an attempt to boost earnings. The company failed to pay a dividend for a third year as it focuses on reducing debt, and isn’t expected to return a dividend to shareholders until the 2016 financial year, according to analyst estimates compiled by Reuters.

“The full impact of the strategic transformation process will not start to be seen until early FY16,” Pumpkin Patch said in a statement. “The company is expecting lower inventory levels and a continued disciplined approach to capital expenditure and other major spend items to be reflected in lower bank debt in the latter part of FY15.”

Pumpkin Patch has had an overhaul of key people. Chief executive Di Humphries took over in August last year, new chief financial officer Steve Mackay starts next week, founder Sally Synnott resigned in July, chair Jane Freeman and director Maurice Prendergast, a former chief executive of the company, will leave next month.

Net bank debt rose 34 percent to $64.9 million while inventory increased 23 percent to $72.7 million which the company said was to ensure timely delivery of new season stock to ensure a smooth start to the 2015 financial year, after the business was hurt by the late delivery of new season stock in the previous year.

The company recorded post-tax reorganisation costs of $11.4 million last year, including a $6.3 million provision for underperforming stores as part of a review of its store footprint, $3.1 million for IT and software writedowns reflecting the need for new inventory and merchandise planning systems, $3.2 million to write down old stock inventory and $2 million of employee reorganisation costs relating to a review of head office functions. It recorded $3.5 million of one-time costs the previous year.

Group sales fell 17 percent to $240.9 million. Overseas sales were impacted by a higher New Zealand dollar, although the higher exchange rate reduced the import costs for the New Zealand business.

The Australian and New Zealand markets were impacted by price discounting amid soft retail conditions, the company said.

In Australia, which accounts for about two thirds of sales, earnings before interest and tax fell 34 percent to $18.9 million as sales slid 1.7 percent to $55.6 million.

In New Zealand, Ebit dropped 8.4 percent to $8.4 million as sales increased 25 percent to $27.8 million.

International Ebit declined 7.1 percent to $4.2 million as sales rose 31 percent to $33.2 million as increased sales of its lower margin Charlie & Me brand to franchise partners and strong UK online sales was partly offset by the loss of a wholesale partner in the US.

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