Pumpkin Patch's North American Downsizing a Prudent, Overdue Move

News out today that Pumpkin Patch [PPL.NZ] are going to ditch 20 of their 35 United States stores is good news for the company and investors.

It means investors will have less pain in the short term and that there is also still a base in North America from which it can expand again when economic conditions are far more rosy. The uncertainty of retailing conditions in the US and just how long things are going to be dire cannot be ignored.

As a shareholder am pleased about management's move but given that the retail sector in the US has been behaving like a WW2 Zero pilot on a suicide mission for an extended period, one could be a little critical that this move wasn't made 6 months ago. Having said that the exit seems to have been well planned.

Of course the US and New Zealand is littered with collapsing retailers, so Pumpkin has done well to survive, let alone make a profit.

Trading in New Zealand and Australia has been surprisingly resilient and my hunch and anecdotal evidence is that very high birth rates in both countries stimulated by welfare targeted at families having kids (a story for another day on another blog) means that demand in this region has been artificially raised - Thank's Aunty Helen!

There will be costs to exit the 20 stores and this will clearly make the bottom line look awful next reporting period in October but in amongst that bad news is one key piece of good news, 11 of the remaining 15 stores in the US have had their leases re-negotiated in a southerly direction. This is one of any retailers biggest sustained costs.

On a personal note, much of my reason to buy this company was its expansion plans in America and I am pleased the company is still going to pursue that market some time in the future. Without that avenue for growth I would have exited the company when the share price recovered.

The share price moved strongly upward on this news mainly because losses in the US will be far lower than previously pegged by analysts.

Look for an opportunity to buy on lower share prices when the forthcoming book entry loss is announced in October.


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