Pumpkin Patch managing director Maurice Prendergast

-Jenny Ruth

Thursday 23rd November 2006

Children's clothing company Pumpkin Patch promised shareholders at the annual meeting improved trading results this year despite tough trading conditions.

The company reported a 15% rise in net profit to $28.5 million for the year ended July 31. The company is expecting to open a record 35 stores this year, after 31 stores last year, including at least 12 in the US, bringing the total to 203.

Sharechat: How many US stores do you have open now?

Pumpkin Patch managing director Maurice Prendergast: We have 13. Six opened since July. We've been very busy up there since July. We've indicated to the market we were looking to open 12 to 15 stores in the US this year.

SC: Why has the US progress been better than expected.

MP: I think there's a genuine acceptance of new brands in the US. In the UK, they're a little more conservative and you have to build your reputation and it's a little slower. Also, we've got a pretty experienced management team up there. We've deliberately gone out and hired the best guys we can find. That's helped give us infrastructure, a leasing team and set of management that understand the characteristics of the business we're in. We also have a good relationship with Westfield who are big in the States. Again, that's just made the job a little bit easier than the UK was. Having said that, we haven't made a profit there yet. We do view things in the mid to longer term in those overseas markets. We know that we're selling strongly but we haven't got to the scale that we need to to turn a profit. In the UK, this is the first year we've turned a profit and it took us five years to get that far.

SC: How much did the lessons you learnt in the UK help?

MP: There's a large amount of learning that goes on in any international market. A lot of the lessons you learn are similar. For us, it was about having experienced people in those markets, improving the logistics chain, making sure we understood the fashion risk. We've been going to the States now for 13 or 14 years and looking at children's wear. It was something we had a good grasp of before we started up. You're not normally so lucky in every market that you've travelled there so often, but the US is one of the places we've got our inspiration from.

SC: Will the US operations be profitable this year or will the costs of store openings be greater?

MP: I think the costs of store openings will probably take away the profits this year. Also the fact that we've got significant infrastructure there but we haven't got the revenue yet. We're happy with the way all the stores are trading. We know we can build on that. The history in the UK tells us we can build on each store. If I took our Glendo store in Los Angeles, it's been open just over a year. That was our first one. What that's given us now is a footprint for what we want in the US. We've already expanded that one. We Obviously won't get every store right, but we will get as many as we can right. When we talk about the US, we like to temper it with a little bit of reality. Whilst it's an exciting market, we know there's a lot of competition there. We have to compete equally with them and better in product terms. There will be an amount of time needed to get our message out and for mums to understand us. The cost of advertising in those markets is quite prohibitive and the same in the UK for smaller players. There's still a lot of work to do there. I don't want to over-sell the story. That's not our style. It's important people realise there's an element of risk.

SC: Warren Couillault at Fisher Funds Management has said 500 plus US stores are possible. Is he right?

MP: We haven't ever gone to a market and said this is the number of stores we're going to do. Take Australia as an example. It wasn't until we got to the first 40 or so stores that we realised our numbers were likely to be towards the 100 number. We just don't know that. We're still finding out about various parts of the market They all have different population bases. Los Angeles has a high hispanic population. I think Spanish is the second language. There are going to be significant differences between cities in the US. Secondly, climatic differences. We have to understand all those first before we can say what store numbers we're going to be looking at.

SC: How accurate is Forsyth Barr's prediction that the UK profit contribution will more than double this year?

MP: That's a good thought. We don't make EBIT predictions at all in any country. There's no doubt the UK is making progress. We've started to get some broad cohesion there. We've got a number of good initiatives that have come together. We now have a full selling web site there. We also have mail order there. We have concessions going into the House of Fraser. I said concessions. We have a wholesale arrangement with House of Fraser. That's going very well for us. All of that helps the brand with the market. That and the fact that we've been there five years, mums have understood the brand and the quality aspects of Pumpkin Patch and the fashion aspect behind it. We're getting some momentum. All that gives you a longer term package in the UK. We're there for the long haul. When you look at the world and the number of brands that can cross borders, there aren't a lot. Next in Europe, Mothercare into European markets, Gap into the UK. Gymboree, our competitor in the US has closed its operation in the UK. All these things tell us it's a difficult strategy to take a clothing brand worldwide.

SC: With the impact of Chinese import quotas be as or more significant this year or have you be able to offset that impact?

MP: The quotas were put in place reasonably suddenly. Because of that, most people incurred significant costs in setting up systems or delaying product travelling through borders or bringing product forward. We had to airfreight product. Because they were brought in suddenly, there was a demand for the quota. There really wasn't time for the market to adjust to having the quota in place. That adjustment has taken place now. Some quotas have become cheaper. We won't see the same level of quota cost this year. Having said that, we will have a whole year of quota rather than seven months. Our systems are in place. I can't work out why lawnmowers don't have quotas but clothing does.

SC: Given that the margins in the wholesale side of the business are so much higher, why aren't you putting more emphasis on it?

MP: We have much smaller overheads and we're able to scale up wholesale sales. We have two types of wholesale arrangements. One where we sell to David Jones, Nordstrom or House of Fraser. We're selective and pick out which departments stores will enhance our brand. We have a good relationship to build our brand without over-exposing our brand into a market. For example, if we were in Myers and David Jones and had our own stores we would start hurting ourselves. That's our strategy in those sort of markets. Then we have countries like the Middle East where it's more like a franchise arrangement. We have Pumpkin Patch stores but someone else is running it on our behalf. It looks like a Pumpkin Patch store but it's a different arrangement. They have a real commitment to the brand. We have 35 stores through the Middle East. The relationship has worked very well for us. We've looked for more relationships like that. Unfortunately we've just lost our relationship with Roche in Ireland because they've been taken over (by Debenhams who only sell their own brand).

SC: Why is the brand successful in the Middle East?

MP: We have the right partner and because the product is an international product. We've put the work in behind it. It's probably the hardest part of the business. It's a product that's sort after by mums everywhere. It has that fashion element but it's practical as well. We put in the hard years of going to Paris and Australia for our artwork. Our design team is constantly travelling for our inspiration. Being in New Zealand from a design point of view can be quite advantageous. We have our own flavour. Chrissy Conyngham is our design director and she's basically led that design team for 14 or 15 years. With our international expansion, part of that is because we've got the infrastructure. We have a huge IT team, we have a fully automated warehouse, we've really put the systems behind our logistics and supply chain to make sure we're delivering to those shops every day.

SC: Are you on track with store openings generally?

MP: Yes. We will at least hit our target this financial year.

SC: What is the overall impact of currency movements on the company?

MP: It isn't a one-way street. In our biggest market, Australia, we're probably at the band end of the currency block at the moment. Increasingly as we go into the US, that's an issue there as well. On our export side, it's quite difficult with a high New Zealand dollar. We do take significant amounts of hedging and that does even our currency exposure. We have benefits, that's true, because we're buying in US dollars, but by far our biggest exposure is on the export side of our business. We would much rather have a low New Zealand dollar.

SC: What's the current retail environment in Australia and New Zealand? The latest figures suggest New Zealand has improved?

MP: We're not seeing that. There are two reasons for that. Generally, our customer is a mother with kids and with a mortgage. She's usually got a bigger car. She's right in the category that has high interest and petrol costs. We've had some rapid expansion in New Zealand and Australia. What we will see is an evening out of our sales. When we go to Australia now, we're not getting a super regional store, we're not getting super drivers from super regional stores. We're getting the Bendigos and Ballarats and the country stores.

SC: Are New Zealand and Australian margins at their maximum possible levels now?

MP: I think we get a very good return out of our Australasian markets. Whether they're at maximum or not, only time will tell. To some extent we get the benefits of economies of scale as we expand internationally. We don't need two design teams, we don't need two IT teams. More importantly, if we grow our international business, it's not so much what happens in New Zealand and Australia but what happens in those overseas markets that will be important for Pumpkin Patch.

SC: In terms of store numbers, are Australia and New Zealand approaching maturity?

MP: We still have some stores we're planning for next year. There's still store growth there for us. There will be store growth, especially in Australia, for some time to come. It will be a matter of is that the best opportunity or would we be better off putting a new store in Los Angeles or London. We have to look where our best return is. By the end of 2007, we're saying we will have over 200 stores.

SC: Why has Pumpkin Patch succeeded offshore when so many other New Zealand companies have failed?

MP: When we take risks, we try to take limited risks. That's an important part of our make up. We're usually a conservative bunch of people. We've taken small steps to grow the brand. We haven't been scared of investing offshore. We've also been careful to build our teams and infrastructure up before we get there. Most of all, you've got to have the product. You've got to have a point of difference. You've got to have a product that can go into a new market and be better than the competitors.

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