Thanks to its banker, the ailing retailer has a reprieve. But can it ever recover? Matt Nippert reports:

As rumours swirled this week around ailing retailer Pumpkin Patch, it wasn't only the company's banker, ANZ, that was taking stock and hedging bets.

Even the teddy bears for sale in the company's stores were being eyed up by its creditors.

Financial statements filed with the Companies Office show that on Wednesday, small Morningside company Teddytime filed security registrations entitling it to repossess Pumpkin Patch-branded soft toys and "cuddly toy blankets".

While wholesalers filing security registrations with retailers to protect their stock is hardly unusual business practice, the register for Pumpkin Patch has been noticeably busier in recent times as creditors digest bad news and weigh the possibility of things getting even worse.

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But despite the company flagging with the NZX a delay in its full-year result, unexpectedly large losses and the ominous-sounding "discussions with its bank", the worst did not come to pass this week.

The children's clothing retailer reported losing major wholesale customers and a bottom-line loss of $9.1 million, which it blamed partly on impairment charges for poorly performing stores - but it secured ANZ's support to try, once again, to turn the corner.

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The company's rise to potential world-beater and subsequent fall to near penny-dreadful has seen fortunes made and lost, and is an impressive narrative arc with an unclear ending.

But for the short term at least, it is now a story about a bank trying to avoid a haircut.

Further down in Pumpkin Patch's full-year notes beyond the headlined extension of its banking arrangements are details of an unusual staggered wind-down of those facilities. Many market participants read that as an exit strategy for ANZ.

Alongside the regular requirements to hit earnings targets, the deal will reduce the company's facility of $60 million to $55 million in August next year, to $45 million the following month, and down to $25 million by the start of 2017.

All up, if Pumpkin Patch hits its marks, the company will retire another $20 million of ANZ debt over the next 15 months.

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Success would be a remarkable escape act for the bank, which only a year ago was owed $61 million by a company widely considered to be floundering.

Chairman Peter Schuyt is unwilling to hear talk of escape plans and talks up his support from bankers.

"We've had a relationship with ANZ since day one, and it's been positive, constructive and productive," he says.

But he acknowledges ANZ will step back a little under the new agreement.

"Yes, this will represent a step-down. We will continue to focus on managing debt down."

Schuyt bristles at recent speculation that Pumpkin Patch's struggles may be terminal.

(One analyst notes this speculation is at least partly driven by what he describes as the "conservative" approach taken by Schuyt's board in declaring risk - such as flags in the two most recent sets of full-year results noting that the company's future as a going concern depends almost entirely on the ongoing support of ANZ.)

The business finally seems to be coming to grips with diabolical stock management, the average age of inventory falling to just over four months from more than six months a year earlier and nearly nine months in 2011.

Sally Synnott, founder of the Pumpkin Patch retail chain of children's clothing stores. Photo / Brett Phibbs
Sally Synnott, founder of the Pumpkin Patch retail chain of children's clothing stores. Photo / Brett Phibbs

Poor stock management compared to its peers - the Glassons and Hallensteins chains turn around stock within a season, or three months - had long meant that tens of millions of dollars were unnecessarily sunk into warehousing and old fashions.

Last year's clearing of inventory, which reduced the value of stock from $64.3 million to $41.2 million, almost entirely accounted for the surge in cash that enabled $20 million to be repaid to ANZ during the year.

This repayment helped improve the ratio of equity to total liabilities from a perilous 34 per cent to still-worrying, 37 per cent.

New managing director Luke Bunt says he hasn't any experience in turning around poorly performing companies.

"But having spent 35 years running good businesses, I know what good looks like."

He says that while his predecessor, the well-regarded Di Humphries, shaded him in design expertise, he is more experienced in finance roles.

He says his immediate focus is on managing currency risks, particularly in the Australian market, as well as trying to win back key wholesale clients lost overseas.

Bunt also pledges to conduct a store-by-store review and again look at the company's online sales - championed by successive management teams as the way of the future - as they have been performing poorly.

"If I'm being brutally honest, it was mainly a vehicle to clear aged stock," Bunt says of the company's online portal.

The market's assessment of whether this latest turnaround plan will succeed is mixed. One senior business participant is unwilling to give odds on the company's chances.

"I'll leave it to others to write the obituary," he says.

The recent results reduced net assets per share a third to 16.6c. Recent trading on the NZX is under this level, suggesting the market has priced in the possibility that the company may not be a going concern.

Another analyst, who also preferred not to be named, warned investors not to expect miracles and that merely surviving two more years to be in a position to continue negotiating with ANZ would be an achievement.

The analyst says the present management - spearheaded by Bunt - is credible and aware of the challenges ahead

The ANZ is also unlikely to be clouded by sentiment and must have seen a reasonable prospect of success, the analyst says.

"They're the most hard-line of the banks, so you can assume there's no benevolence there."

Greg Muir - Former executive chairman of Pumpkin Patch. Photo / Martin Sykes
Greg Muir - Former executive chairman of Pumpkin Patch. Photo / Martin Sykes

But a repeat of pledges to review bricks and mortar and improve online sales is a concern and shows that long-running problems remain worryingly persistent, the analyst says.

"It is staggering they're still doing retailing 101."

Veteran retailer Rod Duke resigned from the Pumpkin Patch board in July, but still holds about 10 per cent of the company's shares.

The retail tycoon says he stepped down so he could focus more on the now-lapsed takeover bid for fellow retailer Kathmandu.

He says the retail sector has had its fair share of strugglers since the global financial crisis, and Pumpkin Patch isn't alone in finding the going tough.

"It's a tricky business. You can't just open a shop and throw in some merchandise and expect it to fly off the shelves."

Duke claims not to have paid attention to developments of the past week at Pumpkin Patch, but thinks the rot set in some time ago.

"I suspect it happened many years ago. These things don't happen where things are fine on the Thursday then terrible on the Monday. I went on to that board two years ago - and I think the issues go back way further than that."

Listed retail chains count the takings

he latest round of company results reveals how other NZX-listed retail stocks are performing.

The Warehouse Group
Has performed above expectations for the year, posting an adjusted full-year profit of $57.1 million after forecasting a range of $52 million to $56 million.

Second-half earnings boosted its result, and the company will be updating its market guidance after the Christmas trading period.

Hallenstein Glasson

The clothing retailer performed above expectations, posting a full-year profit of $17.4 million, up 22 per cent from $14.3 million the previous year.

The Glassons division of the business underperformed for the year, and its profit fell by 17 per cent.

But the Hallensteins and Storm divisions performed well, lifting the overall result. Hallenstein Glasson warned that intense competition was eroding margins.

Kathmandu

The outdoor clothing and equipment retailer posted a fall in net profit - down 51.6 per cent from the previous year, to $20.4 million.

The result was worse than expected, and was blamed on aggressive discounting to move stock, as well as lower demand in Australia. Its full-year 2016 forecast is for a $30 million after-tax profit.

Briscoe Group

Performed well above expectations in the first half of its 2015-16 year, posting a net profit of $20.5 million - 11 per cent above the same period in the previous year and in line with its upgraded guidance.

The group, which owns Briscoes, Rebel Sport and Living and Giving, has been a consistent performer, something that is expected to continue.

Up, up, up ... then crash!

From left, Greg Muir, managing director Maurice Prendergast, Sally Synnott and design director Chrissy Conyngham celebrate Pumpkin Patch's 2004 NZX listing. Photo / Glenn Jeffrey
From left, Greg Muir, managing director Maurice Prendergast, Sally Synnott and design director Chrissy Conyngham celebrate Pumpkin Patch's 2004 NZX listing. Photo / Glenn Jeffrey

Like Icarus, Pumpkin Patch has had a bumpy landing.

The Kiwi company was started by Sally Synnott in 1990, but really took flight after it was floated on the NZX in 2004, going on to become a sharemarket darling valued at nearly $1 billion.

In its early years it developed the sort of reputation a company can easily live with, for under-promising and then over-delivering when profits were announced.

For a time it could do no wrong, expanding rapidly into Australia and then making plans to reach for the stars and simultaneously conquer Britain and the United States.

But the company's ambitions melted, and the after-effects of the subsequent retreat and related crashing and burning can still be seen in its accounts today.

At the time of the great expansion, Pumpkin Patch was chaired by Greg Muir, who quit in 2010 to avoid distractions from his controversial chairmanship of Hanover Finance.

In a rare interview last year, Muir blamed the global financial crisis for the disaster at Pumpkin Patch - a crisis he insists he and his fellow directors didn't see coming.

"Had they done the overseas expansion five or six years earlier - of course that wasn't possible because they were growing like crazy in [Australia] - I'm sure they would have not had to close the stores," he said. "But the GFC came up at the perfectly wrong time for the international strategy."

The roll-call of directors who have joined and then left over the past five years as the board has tried to salvage the company's position includes founder Synnott, Briscoe kingpin Rod Duke and former MediaWorks boss Brent Impey.

Highly-regarded chief executive Di Humphries was appointed in 2013, but stepped down in June.

Duke, who resigned at the same time, said: "I know Di and think she's a very, very, experienced retailer. She obviously found it a bit difficult, too."

At their peak, Pumpkin Patch shares were valued at $4.95. By the time of Humphries' appointment they had slid to 88c.

Late last week, as the market reacted to news that the company was "in discussions" with ANZ (which later agreed to extend finance facilities) shares fetched as little as 8c.

The latest - and perhaps final - effort to turn things around, under new managing director Luke Bunt, will bring another fresh board.

Once Impey's resignation takes effect in November, chairman Peter Schuyt - who joined in August 2012 - will be the company's longest-serving board member.