Pumpkin Patch may breach banking covenants if Xmas sales underperform

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

Pumpkin Patch [NZX: PPL] chair Peter Schuyt says trading conditions remain challenging and the unprofitable childrenswear retailer is in risk of breaching its banking covenants if Christmas sales disappoint. The shares dropped.

The Auckland-based 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, 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."

At the company's annual general meeting in Auckland, Schuyt told shareholders the trading conditions were "challenging" as it entered into its peak Christmas season, but it remained in compliance within its banking covenants. Shares of Pumpkin Patch dropped 12 percent to a more than two decade-low of 30 cents, and have tumbled 62 percent this year.

"The outcome of this trading period will materially affect our financial result and the outlook for the remainder of the year," Schuyt said in speech notes published on the NZX. "Should trading not deliver to expectations over this period, or worsen over the first half of next year, then there is a risk that the company may breach banking covenants in the latter part of this financial year noting that the seasonal trading results will become clearer over the next three to four weeks."

Under the 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.

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.

Pumpkin Patch, like most retailers in the rag trade, is under increased pressure to keep prices cheap as shoppers are lured by bargains from international online retailers. 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, and in August flagged a $12 million charge to write down the value of the software and its retail stores.

Today, chief executive Di Humphries said as part of the review the company was developing a loyalty card, to be capitalise on its customer data, would close non-profit making stores and streamline its head office functions.

The company reported 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 posted 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.

The retailer has had an overhaul of key people since 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.

(BusinessDesk)