Daily ShareChat: Pumpkin Patch

By Jenny Ruth

Thursday 30th April 2009

Children's clothing company Pumpkin Patch should exit the US market where it currently has 35 stores, says First NZ Capital analyst Sarndra Urlich.

"The current state of the (protracted) depressed retail landscape in the US renders Pumpkin Patch's earnings potential in that market even more questionable in our view," Urlich says.

Pumpkin Patch's aggressive store rollout coincided "with the US economy going into a tailspin. While the US had a negligible impact on earnings in 2005 to 2007, the negative impact in 2008 and (forecast) 2009 has been dramatic."

Urlich is forecasting US operating losses of about $14 million compared to operating profits from the company's other activities of about $62 million.

She estimates if the company completely exited the US, her discounted cashflow valuation would rise from $1.02 currently to $1.22.

If it only closed the one-third of stores currently making large losses, and which Urlich believes will never break even, her valuation would be $1.14. That would cut the US operating loss in 2010 from about $13 million to $3.6 million, she says.

"As to whether the remaining 24 stores could eventually move to an acceptable level of profitability and provide Pumpkin Patch with a genuine growth platform, we think the answer is no," Urlich says.

BROKER CALL: First NZ Capital rate Pumpkin Patch as underperform.

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