Pumpkin Patch takes a hit

Kids clothing retailer and manufacturer Pumpkin Patch Ltd [PPL.NZ] profit result out yesterday was a tale of two different stories.

Long-term and short-term stories.

In the long-term Pumpkin Patch will probably do very well but at the moment it is suffering and suffering for a number of reasons, some of them obvious and some of them not so obvious.

The biggest hit on its bottom line is being taken from its stores in the UK and the USA. Both these units are relatively small and have not been established for long.

Although they are growing revenue through increased store numbers, the cost of expansion-they opened 16 US stores last year bringing the total to 34-has hit overall group profit hard and an almost 9 million dollar loss for the year on US stores is a big hit when your profit tips in at just over NZ $17 million.

Not only is the expansion costing money but US retailing is in an even worse state than it is in Australasia, where the bulk of Pumpkin's sales and profit currently come from. The UK division has suffered a similar fate for similar reasons, although losses have been lower than in the US because the brand and its 35 stores in the UK have been established for longer and initial establishment costs have been somewhat ameliorated.

What I like about management's updated growth strategy for the UK and US is that only one store in each country will be opened in 2009 and they will concentrate on establishing the brand further, cutting costs and focusing on margins.

This outlook is the most sensible given current market conditions and the negative retail environment and may have to continue past the end of 2009 because of impacts from the credit crunch.

The break in store growth in these 2 markets will put expansion of the brand into hiatus and delay the economies of scale and logistical capabilities and brand growth that comes with a larger number of stores but the reassessment of growth plans is a decision based on the poor outlook for the retail sector.

Two positive factors in Pumpkin's profit release was the New Zealand and Australian arms of the business.

Australia's 107 stores achieved strong sales, up 11.4% to $198.5m and was the highlight of an otherwise downbeat profit result while New Zealand's 52 stores grew sales 2.0% to $65.6m.

These results were achieved in an Australasian retail market that is experiencing a severe downturn and a recession in New Zealand-management have done well in these two relatively mature growth markets .

The short to medium term for Pumpkin Patch is going to be tough, especially for their UK and US stores but there are some bright spots along the way. A more favourable exchange rate will have a positive impact in 2010 and the removal of quotas for their US stores on Jan 1 2009 will clearly be advantageous to the bottom line.

Long-term Pumpkin Patch has the designers, brand awareness and management to push the company to a major global success story.


Disclosure I own PPL shares in the Share Investor Portfolio.


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c Share Investor 2008

Why did you buy that stock? [The Warehouse Group]

The Warehouse Group [WHS.NZ] has been in the news over the last week, with a Court of Appeal case being heard over its possible future ownership. This saga has been going on for nearly two years now.

That aside, my history of share ownership with this company goes back to 2000 when I first bought a small holding and stupidly sold them on September 11 2001. I then bought more in 2002 and have added to my holding since then.

The main reason I bought this share was that I spent an awful lot of money buying stuff there and noticed lots of other people doing the same. Not a good reason to buy a share, on its own but there are other reasons as well.


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The Warehouse and its dominant position in the market made my decision to buy even clearer. I cant ignore the fact that the company is the largest seller of various products on the New Zealand retail landscape: Music, books and gardening items are among the categories it kills.

This dominance has been impossible for other retailers to chip away at over the company's 25 year history and its low cost business model: goods straight into the store, with "just in time" delivery and sophisticated logistics make it hard for other retailers to compete on price.

It owes alot of its success to the company it is modeled on, Walmart, and apart from an awful execution of an expansion into Australia in 2000 management have been good managers of the business.

Like the other companies in this series, The Warehouse runs a business that is easy to understand and being a rather simple fellow myself that appeals to my investing genes.

The question I always ask, would I buy this share today? The answer would have to be a resounding yes. I am slightly put out that Woolworths or Foodstuffs would want to buy my shares off me because as my readers would know, I like to hold for the long term.

Being part of a larger group or on its own as a publicly listed company The Warehouse look likely to continue to dominate the New Zealand retailing scene.


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c Share Investor 2008 & 2009

Retailers are having a Christmas sale

New Zealand Retail stocks are getting a real bashing at the moment and it seems the market sentiment for this is a lot of media attention about "price slashing" sales before Christmas.

Of course there is good reason to believe that margins will be affected because of discounts. Couple that with the high interest rates, a low US dollar impacting on NZ retailers with an international presence, uncertain seasons driving apparel retailers crazy and gas prices that have had a negative impact on sales through 2007 and you are going to see downward share price movements.

A Hallenstein's store interior

2008 probably isn't going to be much better, with more of the same experience from 2007, so you could see retail share prices continue to go south.

In my opinion though the market has overreacted to the negative news and there are some bargains to be had in retailing stocks.

Hallensteins Glassons, which I'm thinking of adding to my portfolio and has a dividend of over 10% net, hit a low today of NZ$3.84 after hitting the mid 5 bucks earlier this year, while Pumpkin Patch has sunk to $2.60 after almost reaching the magic $5.00 mark only months ago.

Before the High Court dismissal of the Commerce Commission decision to reject two prospective buyers of The Warehouse, its share price was drifting below 5 bucks and that companies sales have slowed and margins contacted and 2008 looks flat to ordinary.

Postie Plus made a loss earlier in the first half of this year and directors are pessimistic for the festive season, while Briscoe Group took a hit to their profit with a 15% dip in recent earnings.

The pressure hasn't hurt the likes of Michael Hill or Restaurant Brand's share prices too much in comparison to others, in fact RBD share prices has gone up while MHI share price has come off recent highs even though profit is up for the year.

That surely shows that market sentiment is punishing retailing stocks down too far.

Like every other sector of the economy retailing has its ups and downs and it is flat to negative at the moment but it wont last. Just like the sales that the retailers are having now and will have over the summer period, retail stocks are having their own sale.

Its up to you which retailer you are going to buy but it really makes sense to add to the long term portfolio when there is a sale happening.

Disclosure: I own Micheal Hill, Warehouse, Postie Plus and Pumpkin Patch shares


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c Share Investor 2007

New Zealand Retailers ring up costs not Tills.

With a few noticeable exceptions, this seasons profit round has been flat to poor. Not a surprise though considering the state of the economy and increased business costs being lumbered onto business by this socialist, business hating Labour Government.

One industry that has fared particularly badly is the retail sector.

The countries largest retailer, The Warehouse(WHS) is likely to book a flat net profit of around NZ$96 million, up from $95.3 million last year.

Hallenstein Glasson(HLG) and Pumpkin Patch(PPL) are soon to report their profit results while Briscoe Group(BGR)reported a just over 12 % drop in half-year net profit to $10.53 million Friday 7 September.

Hallenstein Glasson and The Warehouse release profit figures Friday 14 September, and Pumpkin Patch is releasing its results on Monday 17 September. Pumpkin Patch's profit will be affected mostly by the weaker US dollar and stronger Kiwi as profits from foreign shores come back to New Zealand where the company is based.

Smaller retailers like Postie Plus Group (PPG) and the fast food operator Restaurant Brands (RBD) are likely to be similarly affected. RBD is likely to post an improved profit but coming from a loss last reporting season that wont be hard to achieve.

The worst performer has been Hellaby Holdings, they booked a loss of more than $9 million recently. This has been mainly due to poor results from their BBQ Factory chain which they overpaid for 2 years ago and are about to start litigation against former owners the ASB Bank.

Micheal Hill(MHI) the Jeweller has done well this last year, with increased sales and profit. They have benefited from expansion but they have also been one of the few retailers that have done well out of the lower $US dollar , making their core cost, gold, considerably cheaper.

The retail sector has had pressure in general from a multiple shot at the bottom line from increased operating costs. Labour's raising of the minimum wage, parental leave costs, increased holidays and a myriad of other central and local government compliance's have hit retailers and other business sectors with a whiplash effect and it is not about to end soon.

Kiwisaver compliance and the removal of youth rates will hit this sector again in the coming year/s.

Retailers have also been hit by petrol, power and interest rate rises, directly on their business operating side and again with consumers having less to spend on their goods and services because of the rises in these costs.

This slump isn't going to go away anytime soon but it is not terminal for the strong retailers.

A good opportunity exists now for those long term investors to buy stock in those companies that you have had your eyes on but were maybe too expensive to warrant a buy for now their stocks have been beaten down to a level that looks a lot more attractive.

Disclosure: I own PPL shares


c Share Investor 2007