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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