Monday, September 17, 2007

Pumpkin Patch profits Flatten

Pumpkin Patch Ltd [PPL.NZ] the small global trendy kids clothing retailer, has announced its full year profit today and reported an annual net profit after tax down 3.2 per cent to NZ$27.6 million.

Sales revenues were up 17.9 per cent to $365.7 million for the year to the end of July.

The high $NZ exchange rate hit net profit as foreign revenue is brought back to head office, which is in New Zealand.

The network of stores increased by 35 over the last year to 200 but the expansion, especially in the US and UK markets hit the bottom line as logistical frameworks were put in place for further future expansion.

It looks likely that company profits will remain flat in the near term because of the increased costs of expansion in combination with what looks to be a kiwi dollar that will remain high.

Currently the company is suffering from high tariffs being placed on Pumpkin Patch product in the UK and the US but there has been some movement by those particular authorities to change tariff quotas. Management are hopeful.

Clearly increasing revenues from expansion will offset the increasing costs of same but the full benefit will only be seen once economies of scale can be brought to the US and UK divisions and that is going to take some considerable time in my opinion.

Micheal Hill International [MHI.NZ]is facing similar business start up problems as it establishes its jewelry chain in Canada.

It seems that once a brand enters into a new market it takes a year or two before it builds enough momentum and gets recognized and loved as it already is in Australia and New Zealand.

Australia already has 102 stores and NZ has the most per capita of the countries that it operates in, at 50.

The main growth area for Pumpkin Patch is going to be the USA. Pumpkin Patch opened its first US store in Los Angeles in 2005. Stores are predominately located on the West Coast but further sites are being sought in the Southwest.

Two stores have been opened in Texas and management have announced today that they will be moving into East Coast locations soon.

My guess is that the US has room for around 1000 stores so the company is clearly going to be a very different one in the 10 years or more that this is going to take, if the company keeps its head above water in this very tough and uncompromising market.

Short term, sales in New Zealand and Australia markets, where most of the Patch profit is earned, are likely to be dampened by a weak economy, with high interest rates, increased taxes and other living expenses having impacts on individuals non-essential spending habits.

Long-term though, if company expansion is successful, then we are likely to see an excellent returns for shareholders.

A final dividend for 2007 of 4.5c per share will be paid 17th October 2007, with a record date of 5th October 2007.

PPL shares closed up 5c today to $3.30, close to its lows for the year.

*Disclosure: I own PPL shares

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Related Links

Pumpkin Patch financial data

Related Amazon reading

Attracting the next generation of customers: retailers offer insights into marketing to kids.(Cover story): An article from: Hardware Retailing

Attracting the next generation of customers: retailers offer insights into marketing to kids.(Cover story): An article from: Hardware Retailing by Luke Dunscombe
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Available for download now

c Share Investor 2007

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