Retailer may breach banking covenants if sales below expectations.

Pumpkin Patch has hired Goldman Sachs as an adviser on its capital and funding requirements and says a share issue is an option for the children's clothing retailer, which has warned it could breach banking covenants if trading over the Christmas period falls below expectations.

And a reduction in the company's store footprint is also on the cards, with unprofitable outlets set to be shut down as part of a wide-ranging turnaround plan.

Chairman Peter Schuyt told shareholders at the firm's annual meeting yesterday that Pumpkin Patch had a long-term and positive relationship with ANZ and was currently in compliance with its banking covenants.

However, competition and discounting continued to put pressure on revenue and margins and the firm was only part-way into the peak Christmas trading period.

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"The outcome of this trading period will materially affect our financial result and the outlook for the remainder of the year," Schuyt said. "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."

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Pumpkin Patch shares closed down 4.5c at a record low of 29.5c last night.

Salt Funds Management managing director Paul Harrison said feedback suggested the retail sector had seen a pick-up in business since last month and he was not concerned about Pumpkin Patch breaching bank covenants.

"There's certainly no indication to us that Christmas [trading] should be soft," Harrison said.

Pumpkin Patch had net bank debt of $64.9 million at July 31, up from $48.3 million a year earlier. The company has attributed the increase to the delivery of new season stock it needed to avoid the problems it faced last year as a result of late deliveries.

The retailer reported a net profit after reorganisation costs of $1.2 million for the year to July 31, down from $8.5 million the previous year.

Pumpkin Patch has been facing headwinds from high levels of margin-sapping promotional discounting and subdued consumer sentiment, particularly in Australia, its largest market.

Schuyt said a capital raising through a share issue was "one of a number of options" they were working through with Goldman Sachs.

"As a board we've had some preliminary conversations based on options they [Goldman Sachs] have presented to us," he said. "We haven't progressed sufficiently far to present to the market and shareholders in terms of a preferred way forward."

Chief executive Di Humphries said it was too early to comment on how many unprofitable stores might be closed.

"We're just working through that at the moment," she said.

Pumpkin Patch had 186 stores in Australia, New Zealand and Ireland at the end of its last financial year.

Other aspects of the company's two-year turnaround plan include the installation of a new IT system and reductions in the time it takes to get products from design, through manufacturing, to customers.

Humphries said Pumpkin Patch was looking to reduce lead-times on products from eight months to four, which would ease the financial burden of holding large amounts of stock.

Pumpkin Patch has not declared a final dividend, saying a reduction in bank debt is its key priority.

Pumpkin Patch

• In compliance with banking covenants but warns they could be breached if sales fall short over the crucial Christmas period.

• Has hired Goldman Sachs as an adviser on capital and funding requirements.

• In the midst of a two-year turnaround push, with key aspects including a new IT system, shortened lead-times for stock and the closure of unprofitable stores.

Read Peter Schuyt's speech here: