A rough Patch
On Friday, children’s clothing retailer, Pumpkin Patch, issued a profit downgrade for the financial year ending 31 July 2013. The company announced that it now expects earnings after tax to be between $7.5m-$9.0m, which is an 11 – 26% fall from the previous years earnings.
The share price fell eight cents to 78c on the day of the announcement. Share price weakness through June suggests this announcement of a profit downgrade was anticipated.
There are two main reasons for the lower profit outlook. Firstly, the recent trading conditions in Australia have been weak which has led to the company increasing its promotional activity. Secondly, the late arrival of winter has had a lingering effect on apparel retailers as they are now carrying higher levels of inventory.
Weak retail spending plus higher than normal inventory levels has led to many retailers starting their end of season sales much earlier and discounting more aggressively than usual to maintain market share. This aggressive behaviour usually comes at a cost to margins and in turn, the bottom line. This is the case with Pumpkin Patch.
The company is in the final stages of implementing many strategic changes. It has employed a new Brand Director, who is expected to bring a superior level of expertise in brand development and design to the company and her first range is expected to be in stores in August this year. Improvements are being made in stock control with stock no longer being ordered six to nine months in advance. This gives the company more flexibly around controlling inventory volumes. It has also managed to strengthen the balance sheet by reducing debt.
This downgrade is not specific to Pumpkin Patch. Hallenstein Glasson also released an earnings downgrade for the same financial year. It stated similar reasons to Pumpkin Patch, namely difficult trading conditions in Australia and a late start to winter. Target, the large discount apparel retailer in Australia, also announced it expects earnings to be 35% lower then the previous year, also due to the same reasons.
However, Kathmandu, which also has a 31 July year end, is currently in its most important sales period. This annual ‘Winter Sale’ accounts for 30% of the year’s sales and is essential in determining full year company performance. The delayed (and cold) arrival of winter may turn out to be a blessing for this retailer.
The retail environment remains challenging, particularly in Australia, and we don’t see a strong pick up in consumer spending any time soon. Despite the trading headwinds referred to, the organisational improvements being made by Pumpkin Patch and the strategic direction taken by the company are encouraging. Its future share price performance will depend on the results of its strategic initiatives and trading conditions across the Tasman, where it generates 60% of its sales.
Disclosure of interest: Milford Funds own shares in Pumpkin Patch and Kathmandu.