Pumpkin Patch stock sinks to record low on concern ailing retailer may seek more capital

Pumpkin Patch shares fell to a record low on concern the unprofitable children's clothing chain may seek new capital to bolster its balance sheet after saying it may breach bank covenants.

Chairman Peter Schuyt told shareholders at their annual meeting yesterday that trading conditions were "challenging" and the retailer at risk of breaching banking covenants should Christmas sales disappoint. The company has hired investment bank Goldman Sachs to review its capital structure and look at "other strategic alternatives". The shares dropped 12 percent to 26 cents and have tumbled 67 percent this year.

"The financial position has deteriorated further and now they're getting close to that tipping point where their bankers will start to get edgy about whether they're actually in a financially viable spot," said Mark Lister, head of private wealth research for Craigs Investment Partners. "When companies say they've appointed an investment bank to review the capital structure, that is often code for we might need to come cap in hand to shareholders and ask for more capital to shore up the balance sheet and put us on a more stable footing."

"That scenario would mean they'd have to probably do a discounted rights issue, which would see the share price fall," Lister said.

The company's annual report, which was tagged by its auditor, shows the retailer renegotiated the terms of its banking arrangements with ANZ Bank New Zealand. The board saw that move as "prudent to provide accommodation for potential adverse results arising from a challenging trading environment while an extended facility was negotiated." Schuyt told shareholders Pumpkin Patch is currently complying with the terms of its loans, but was relying on the peak Christmas season delivering much-needed sales growth.

"The outcome of this trading period will materially affect our financial result and the outlook for the remainder of the year," Schuyt said yesterday. The pace of seasonal shopping "will become clearer over the next three to four weeks."

Under its new covenants, Pumpkin Patch has to meet a guaranteeing group coverage ratio, and remain within 20 percent of forecast earnings before interest, tax, depreciation and amortisation on a rolling 12-month basis. The retailer also told the bank it doesn't intend on paying a dividend in the 2015 financial year, and will have to get the lender's permission if that position changes.

Pumpkin Patch, like many clothing retailers, is being forced to discount stock to maintain sales in the face of rivalry from international online retailers. New Zealanders have enjoyed increased spending power overseas as a result of the high kiwi dollar. The children's clothing retailer exited the NZX 50 Index last year and has since been followed by clothing chain Hallenstein Glasson Holdings and Brisbane-based jeweller Michael Hill International.

"It's a retail-led and consumer-led change in behaviour, rather than the fault of the company operating in that sector," said Rickey Ward, NZ equity manager at JB Were New Zealand. "The higher currency has allowed a whole lot more people to look online and buy from competing international suppliers that don't have a retail presence here."

By contrast, "Pumpkin Patch has real estate," he said. "They've got a whole lot of things which are fixed costs and when you don't get the revenue side coming through and you can't reduce your costs you have margin squeezes. They haven't been alone in that. We see shops all around struggling with that, you could blame other things like they didn't manage the inventory, but it doesn't hide from the fact the industry has changed."

In March, the company embarked on a strategic review in a bid to revive its ailing performance, focusing on its store footprint, stock levels, and an IT system upgrade. It flagged a $12 million charge to write down the value of software and retail stores in August.

Pumpkin Patch reported a loss of $10.2 million in the 12 months ended July 31, from a profit of $5.1 million a year earlier. It had an operating cash outflow of $8 million in the year, compared to an inflow of $14.2 million in 2013, and had cash and equivalents of $1.1 million at the July 31 balance date.