News that indebted children's-wear retailer Pumpkin Patch is to close 20 of its 35 United States stores - as the US financial crisis and recession wear on - prompted an 11% spike in its share value yesterday.
Its US trading subsidiary has been placed in chapter 11 bankruptcy, which allows protected trading to continue while restructuring is under way. Pumpkin Patch chief financial officer Matthew Washington expects this to be completed within about two months.
At opening, Pumpkin Patch shares leapt 11% to $1.50 yesterday, and they closed at $1.49.
New Zealand-based Pumpkin Patch, founded in 1991, was floated for $120 million in June 2004 and had since grown from 89 shops in New Zealand, Australia and Britain to 240 stores worldwide.
After a review which began in February, chief executive Maurice Prendergast yesterday announced the closure of 20 "recently opened" US stores because of import quotas and the US' "prolonged financial crisis".
"[This] has created significant headwinds for the profitability of the US operation," he said.
ABN Amro Craigs broker Peter McIntyre said it was a sound management decision to "pull back from the growth strategy if it wasn't working".
"The closures reflect strong management decisions. They have pulled back from their growth strategy instead of letting the company bleed for the sake of bleeding," Mr McIntyre said.
Forsyth Barr broker Tony Conroy said with Pumpkin Patch's US holding company in chapter 11, the company could reject leases and negotiate very low lease-exit payments.
"The positive news in the announcement is the much lower-than-expected exit costs from the less-profitable stores," Mr Conroy said.
For the six months to January, Pumpkin Patch's revenue rose 3% to $211 million but its after-tax profit fell 7% to $9.5 million. US earnings before interest and tax were "significantly affected", the US sector posting a $6.2 million loss compared with a $2.5 million loss for the corresponding period a year earlier.
Mr Prendergast said "assuming no further deterioration" in trading, the 20 store closures and head office reductions would in 2010 reduce analysts' forecasts of a $13 million loss to a $3 million loss, improving group earnings and cash-flow results for the period.
Bank debt at year-end 2009 was expected to be "at the lower end" of a forecast $30 million to $40 million range, overall debt reduction would be about 60%, and inventory levels would be "significantly lower", Mr Prendergast said.
Mr McIntyre said while "quick global growth" had fuelled the high level of debt, the closures were likely to boost the bottom line by $10 million. "Key" to any retailer during recessionary times was to carry less inventory, he said.
Full-year, after-tax profit was $28.5 million in 2006, $27.6 million in 2007 and $17 million in 2008. Full-year 2009 results are not out until September but ABN has forecast an after-tax profit of $14 million.
