Pumpkin Patch accounts tagged over reliance on banker

Pumpkin Patch's [NZX: PPL] 2014 annual accounts were tagged by auditor PwC over the unprofitable childrenswear retailer's reliance on bank funding to continue trading as a going concern.

The auditor's report is included in the Auckland-based company's annual report, which was filed to the stock exchange today, and shows the retailer renegotiated the terms of its banking arrangements with ANZ Bank New Zealand, which the board saw as "prudent to provide accommodation for potential adverse results arising from a challenging trading environment while an extended facility was negotiated."

The new covenants agreed to mean Pumpkin Patch has to meet a guaranteeing group coverage ratio, and to 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.

Still, the board, which has undergone a major overhaul, signed off on the accounts as a going concern, saying the retailer "can trade profitably and meet its bank covenants for a period of 12 months" based on assumed sales growth and a reduction of net debt.

Auditor PwC tagged the accounts with an emphasis of matter, without qualifying its opinion, citing the company's dependence on meeting obligations under the bank facility agreement.

"If the group is unable to comply with its bank covenants, renegotiate its facility or obtain alternative sources of funding, then this indicates the existence of a material uncertainty that may cast significant doubt about the company’s and group’s ability to continue as a going concern," PwC said.

Pumpkin Patch's new banking facility of $75 million was down from a previous $100 million, and the retailer had drawn on $66 million as at July 31, compared to $52 million a year earlier. The first $25 million tranche comes due next September, while $50 million is due February 2016, with an annual weighted average interest rate of 5.35 percent, up from 3.89 percent a year earlier.

The annual report confirms the result reported in September, when the company turned to a loss of $10.2 million in the 12 months ended July 31 from a profit of $5.1 million a year earlier. Pumpkin Patch reported 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, propped up by a $14 million drawdown of its lending facility.

Pumpkin Patch, which suffered a series of setbacks last year including disruptions to its supply chain as increased rivalry drove down prices, has embarked on a two-year "transformation process" in an attempt to boost earnings, and the annual report says the new banking arrangements have been structured to align with the strategic review.

The retailer has had an overhaul of key people since chief executive Di Humphries took over in August last year, including the recent appointment of new chief financial officer Steve Mackay. Founder Sally Synnott resigned from the board in July, while chair Jane Freeman and director Maurice Prendergast, a former chief executive of the company, have also resigned.

The children's clothing retailer exited the NZX 50 Index last year and has since been followed by fellow retailers Hallenstein Glasson, the local clothing chain, and Brisbane-based jeweller Michael Hill International this year. Retailers, especially those in the rag trade, are under increased pressure to lower prices as shoppers are lured by bargains from international online retailers.

Shares of the retailer were unchanged at 39 cents and have fallen 56 percent since the start of the year to be the third-worst performer on the New Zealand Capital Index. The stock is rated an average of "hold" based on the consensus of three analysts as surveyed by Reuters, with a median price target of 42 cents.

(BusinessDesk)