Retailer survives rough patch

TIM HUNTER
Last updated 05:00 31/03/2013
Pumpkin Patch
JOHN SELKIRK/Fairfax NZ

Children’s fashion is not just hot, it’s also a crowded market, as Pumpkin Patch chief executive Neil Cowie, left, is discovering. He is listening to former CEO Maurice Prendergast.

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The kids' clothing business is so hot right now. I mean, like, Portia Freeman, the model, is super excited about it.

"I think it's important to celebrate children's fashion to show everybody just how amazing it is and women and men all around the world wear amazing clothes so it's really important that children can too."

That's what she said about Global Kids Fashion Week, a big upmarket show in London this month co-organised by online retailer AlexandAlexa.com. Sure it was her job as Global Kids Fashion Week ambassador to be excited about it, but this is big business. The children's clothing market in Britain alone is worth about £6.5 billion ($11.8b) and the top fashion brands are all producing designer lines for kids.

These days you can get Paul Smith Junior, Junior Gaultier, Little Marc Jacobs. Romeo Beckham, son of footballer David, has been modelling a children's range for Burberry.

With doting parents spending big money, kids' fashion is not just hot but an increasingly crowded and competitive market - as a Google search will testify.

Investors may think this makes life hard for New Zealand children's wear company Pumpkin Patch. In its youth, it was a market darling, but age has taken the shine off its cheeks and slowed the skip in its step - from highs of more than $4 in 2006 and 2007, the share price has tumbled to trade as low as 58c before recovering to $1.45 in January.

There was more slippage on March 18 when Pumpkin Patch published its half-year results. Although the bottom line was much improved on a year earlier - a profit of $4.7 million compared with a loss of $30m, the operating performance was not as good as it should have been.

Chief executive Neil Cowie acknowledged stock for the summer season had been delivered late. "This meant the level and mix of inventory was not ideal and sales opportunities were lost. Even though trading conditions across the rest of the period more closely tracked last year and we had a reasonable Christmas, we couldn't recoup the sales and earnings lost at the start of the season."

In retail, stocking is fundamental and for Pumpkin Patch to have problems with it is not a good look. Cowie has not elaborated on what went wrong, but told The Dominion Post the impact might have been $2m to $3m worth of sales.

It appears the problem has since been fixed, but the market was unforgiving, pushing the shares down from $1.25 to $1.13 in the following few days.

There are good reasons for investors to be wary about Pumpkin Patch, not least that it is still some way from paying a dividend - it hasn't paid out since 2011 and says it will review dividend policy "at year end".

However, its unpopularity is itself a good reason to give it some close attention - and a closer look reveals positive developments. For example, revenue was down in the half but margins were up and one of the reasons for the higher profitability seems to be the company's multi-channel selling strategy. As well as the familiar New Zealand stores, Pumpkin Patch has been pursuing sales online and through other retailers in overseas markets.

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Its segmented retail brand Charlie & Me is gaining traction, particularly in the Middle East, but it is the online outlet that is particularly promising. Global sales in the half were $19m and online earnings again exceeded the earnings before interest and tax for all New Zealand stores put together. Given New Zealand stores had revenue of $28m and earnings of $4.8m, online looks highly profitable.

After Pumpkin Patch had to suck up big losses from previous attempts to expand in Britain and the United States, those markets are now being served by company-owned websites and producing much better results. The online channel has also been expanded to general items such as kids' bed linen and furniture.

"It's a strategy that makes a lot of sense," says fund manager Matt Goodson, of BT Funds. The overseas market will be tough online because the Pumpkin Patch brand is not well known, he says, but "the business we really like is their wholesale business because you don't have capital tied up".

In wholesale, the company sells its products through other retail outlets such as departments stores and branded outlets owned by third parties.

Among the believers is Briscoe Group managing director Rod Duke, who bought 16 million shares and joined the board last June. Milford Asset Management has just eased its holding on behalf of the Super Fund but remains a significant shareholder through its Active Growth Fund. AMP Capital was buying late last year, increasing its stake from 5.5 per cent to 6.6 per cent.

Others seem less convinced - ACC was selling some of its holding last year - but the low share price could be an opportunity even in the brutally competitive kids' wear business.

"It's been a change process," says Goodson. "The jury's still out but we're hopeful. There's a chance they'll make it."

Tim Hunter is deputy editor of the Fairfax Business Bureau. He owns Pumpkin Patch shares.

Clarification: In last week's column he quoted GPG chairman Rob Campbell saying the company board's view was that residual business of Coats plus the cash from disposals "is worth a lot more than 69c [a share]". Although he was quoted correctly, Campbell says he had meant to say the assets were worth more than 60c.

- Sunday Star Times

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