Thursday, June 16, 2011

Pumpkin Patch Ltd: Management need to walk

I have been a long suffering Pumpkin Patch Ltd [PPL.NZX] for 5 years and the losses to the portfolio have been significant in terms of this share.

The latest bad news and profit downgrade out yesterday has got me thinking about the future of this share in the Share Investor Portfolio, and the future for the company under present management.

Lets go back over the last 5 years and see how the company has progressed.

Revenue for the patch has gone from $280 million and $24.6 million profit in 2005 to $381 million revenue and $25.5 million profit in 2010. It hasn't been a straightline from 2005 - 201o but patchy progress with big dips in profit between those years.

The entry of the company into the United States in 2005 was done slowly and they tested the market but clearly mistakes were made along the way as they continued to roll out US stores even though they never really fired. In 2009 the company made a decision to abandon 20 or so US stores that were bleeding red ink the most and held onto around 15 that they saw as promising. Over the last 2 years the company even opened an additional 5 stores in that market!

As we know yesterday the pumpkin pulled the plug on the remaining US stores with a cost of some $11 million, which takes the combined cost of entry into the US market of close to $50 million. This excludes lost opportunity costs.

Now I wasn't against expansion into this market and seemed very bullish about the long term prospects for the company back in 2008 but much water, poor decisions, and 50 million bucks has passed under the bridge since then so you can excuse me if my mind has changed somewhat.

The expansion was clearly executed poorly.

Yes, retailing has been suffering globally over the last 3 years, especially in the United States but management should have seen the writing on the wall after 3 years of being in the states in 2009 and pulled the plug back then. It defies belief to think that they were still confident that the company could make a go of it and took a further 2 years to come to yesterdays conclusion.

Management that made decisions to enter the US and stay there while sustaining these big losses are still at the helm and shareholders should be asking whether they should still be there given they have problems in the United Kingdom with stores having been there for the best part of a decade and yet to turn a profit yet management are bullish about being in this market:

"The United Kingdom and the recently opened Ireland stores remain an important part of the Company’s long term growth strategies. The plans being developed for the United Kingdom will enhance overall short term earnings performances and provide a stronger and more sustainable platform on which to implement future growth strategies".

I am picking that UK stores will be closed sometime in the future, they should be, they are losing shareholder money, but management still see fit to continue their failing experiment.

Ironically the only people losing their jobs are some at head office in Auckland and direct store management and workers on the ground in the United States and management have commented on this in yesterdays release:

“We have always prided ourselves of the closeness of our teams that operate across the business. While the decisions we have made today are necessary we cannot overlook the fact that a large number of our team members will be impacted, with many being long serving employees who have contributed to the success of Pumpkin Patch over the years. We will of course be doing everything we can to help them and the rest of the team during this time. We would like to thank all of the team for their continued support and enthusiasm for the brand”.

I would like to see a board replacement and the resignation of key directors including CEO Maurice Prendergast. Their expansion plans have failed dsmally and have cost investors hundreds of millions in lost share value and close to $50 million off the bottomline.

Nothing personal, its just business.

Disc I own PPL shares in the Share Investor Portfolio

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c Share Investor 2011