NEWS RELEASE - FOR IMMEDIATE RELEASE Caption: A model wearing an outfit from Pumpkin Patch’s Winter 2014 collection. Images: for publication can be downloaded here Video: High Definition B-Roll Footage can be downloaded here Pumpkin Patch Limited Unaudited results for the 6 months ended 31 January 2014 Headline Financial Numbers Operating revenue (continuing operations) Net profit after tax (before reorganisation costs) (1) Reorganisation costs (after tax) (1) Net profit after tax Net bank debt (1) Inventory Shareholders’ Funds (1) January 2014 ($’000) 6 months January 2013 ($’000) 6 months 127,792 153,086 (16.5%) 1,348 6,506 (79.3%) (1,242) (1,806) 31.2% 106 4,700 (97.7%) 53,188 69,752 55,180 65,735 70,404 44,372 (19.1%) (0.9%) 24.4% This is a non-GAAP measure. A reconciliation to NZX Appendix 1 is attached Pumpkin Patch Limited 1 Speciality childrenswear company, Pumpkin Patch, today released its unaudited result for the six months ended 31 January 2014. Total revenue for the six months to 31 January 2014 from the continuing business operations was $127.8m, down 17% on 1H13. Excluding reorganisation costs, underlying net earnings for the six months were $1.3m (HY13: $6.5m). Commenting on the result, Chief Executive Di Humphries said “The result reflects the challenging conditions in core markets, especially for apparel retailers, however we have many multi-channel and multi-brand opportunities available to us and we are making the changes needed to take advantage of them.” she said. “I said when I took on this role that there was a lot of work to do to achieve the results expected from the company. Planning and implementing the changes needed in a company of this size and complexity does and will take time. However, work is already underway starting with changes made during the first half period to the Head Office support and executive structure to manage costs and build the capability and talent needed to drive the future direction of Pumpkin Patch.” Recent appointments to the company include Brenda Pennycuick as Chief Operating Officer, who came from Glassons, and brand and digital marketing specialist Kellie Nathan, who joined Pumpkin Patch as General Manager of Marketing after being heavily involved in the recent brand changes at Telecom. “These organisational changes have generated around $3m per annum overhead savings. While we are reinvesting some of this back into key areas, such as the design and marketing functions, the bulk of the savings will be retained.” Humphries said. A process to update Pumpkin Patch’s long term strategic plan, underpinned by detailed inmarket consumer research, is also underway. PPL Chairperson, Jane Freeman said the company expects to be in a position to share details of the strategy and consumer insights from the research mid-year 2014. Freeman said PPL has very strong brands in Australasia, a well advanced multi-channel presence in core markets, and a growing international online and wholesale operation across some key international markets. “Our international database means we are strongly positioned for international growth in online shopping, but we need to ensure we have a very clear understanding of customers’ needs and how they expect us to connect with them. The strategic plan will establish the road map for this.” As reported to shareholders at last year’s annual shareholders meeting, sales for a large part of the summer season were materially impacted by major supply chain disruptions resulting from the failure of two core suppliers and major flooding in a key supply region in China. Additionally apparel spending in the company’s core markets, Australia and New Zealand was weak in December with heavy discounting through the Christmas trading period. Humphries said that the trading results from Australia were “disappointing” and considerable focus is being directed at confirming longer term plans for the Australian market. “Although our Pumpkin Patch Limited 2 strategic plans are becoming more internationally focused, improving the trading results and developing long term plans for the Australian store network remain priority areas. The Australian operation will directly benefit from the other changes we are making, in particular the branding and supply chain initiatives.” The company has continued to expand multi-channel capability by adding more online flexibility and functionality to allow customers to shop the way they want to. “We continue to revamp our websites and customers are increasingly using the ‘click and collect’ service that is now available across all Australasian stores. The ‘e-counter’ service is up and running in New Zealand and will be rolled out across Australian stores in the coming months,” Humphries said. Di Humphries said she is ‘generally pleased’ with how the International division has traded, despite the challenges many international partners faced in their local markets, high exchange rates and the impact of changes to the timing of deliveries to some wholesale partners. “While there is work to be done to improve the performances in Ireland, excluding that market, earnings from international wholesale and online markets were up 24%.” “While heavy discounting continues in the Australian and New Zealand markets, Pumpkin Patch is seen as a premium brand internationally. The more I have seen of our international markets the more excited I am about the opportunities that exist for us offshore. For this reason, I am taking a very international view of our future,” Humphries said. “Given some of the international relationships we are developing and the opportunities that are out there for us, I expect to see some decent earnings growth from our International business unit over the next few years,” she said. While Australasian online sales were materially impacted by the supply disruptions during the season, Humphries expects to see considerable local and international earnings growth from online sales once a number of the strategic changes are made and bedded in. “The online division still generates earnings significantly higher than all of our New Zealand stores combined.” “The 34% increase in sales through international Pumpkin Patch websites shows that our long term online future is not just restricted to local markets. We will continue to take an international view of online opportunities given the ongoing sales growth through our sites, third party websites, and other multi-channel operators.” Di Humphries said changes being made across the business will boost the company’s advantages to build further online sales growth. “We already have a significant international database of customers and are building our in-house design capability and much stricter management and control over our supply chain.” Customer uptake of the Charlie & Me brand continues to be strong both in store and online. Humphries said that over the last six months Charlie & Me had delivered solid sales and earnings growth despite the challenging retail environment. “Although it is still early days, the Charlie & Me brand is trading strongly in international markets and we are developing a number of online and in store international opportunities for the brand.” Humphries said debt and key balance sheet items “continue to trend in the right direction” with bank debt down 19% on last year and shareholders’ funds up 24%. “Over the coming year we Pumpkin Patch Limited 3 may see some volatility in the numbers as we implement strategic initiatives, however we are confident those initiatives will significantly strengthen the balance sheet in the long term,” she said. Chairperson Jane Freeman said, “The changes we are making across the business are necessary for us to take advantage of the many exciting local and international opportunities that exist for Pumpkin Patch and to improve the financial performances of all business units. While the change process is challenging and the trading conditions we are facing are likely to remain tough for some time, we are not daunted by the hard work that is required.” ENDS Pumpkin Patch Limited 19 March 2014 ---------------------------------------------------------------------------------------------------------For further information please contact: • Media: Trish Sherson (Sherson Willis) +64 21 570 803 or trish@shersonwillis.com • Analysts/ investors: Matthew Washington (Chief Financial Officer) +64 9 274 7088 The full Chief Executive Officer’s commentary that formed part of today’s announcement to the NZX is attached. Pumpkin Patch Limited 4 Pumpkin Patch Limited Unaudited result for the 6 months ended 31 January 2014 Notes: • All references to dollars are NZ Dollars unless otherwise stated • This document should be read in conjunction with the Appendix 1 document filed with the NZX Overview Pumpkin Patch Limited has today announced its unaudited result for the 6 months ended 31 January 2014. As reported at last year’s annual shareholders meeting the company, along with other apparel retailers, faced challenging trading conditions across its core markets especially in its largest market Australia. These conditions did not materially improve across the Christmas sales period. Trading activity for the retail and online business units was also materially impacted by major supply chain disruptions resulting from the failure of two core suppliers and major flooding in a key supply region in China. Total group revenue for the period was $127.8m, down 17% on last year. Total Group after tax earnings excluding reorganisation costs were $1.3m1 (HY13: $6.5m). After reorganisation costs reported total after tax earnings were $0.1m (HY13: $4.7m). As a result of the ongoing strategic review program reorganisation costs of $1.8m were recognised (HY13: $2.6m). Despite the challenging trading conditions and the ongoing reorganisation process being undertaken the balance sheet continues to strengthen. Net bank debt at January was down $13m or 19% to $53m (HY13: $66m) and shareholders’ funds were $55m, up 24% (HY13: $44m). Overview of HY14 Financial Result Australia The supply chain disruptions combined with the soft underlying retail environment and higher levels of promotional activity to create very challenging trading conditions in Australia. The higher average NZD/ AUD exchange rate accentuated the NZD impact of the lower sales result. Total sales for the period were $82.8m, down 19%. The unavailability of stock in some key product categories resulted in missed full price sales opportunities. This along with a general increase in promotional activity, the higher average exchange rate, and the fixed nature of store overheads led to a reduction in overall segment EBIT margins to 12.6%. Total segment EBIT was $10.5m (HY13: $16.0m). 1This is a non-GAAP measure. A reconciliation to NZX Appendix 1 is attached Pumpkin Patch Limited 5 New Zealand While underlying retail conditions were not as challenging as in Australia, the New Zealand retail and online operations were also impacted by the supply chain disruptions and experienced higher levels of general promotional activity. Sales totalled $24.1m, down 14%. The impact of the supply chain disruptions, higher levels of promotional activity and the fixed nature of store overheads resulted in total segment EBIT margins decreasing to 16.4%. Total segment EBIT was $4.0m (HY13: $4.8m). International Total sales for the period were $20.9m, down 6%. A 34% increase in international online sales through company operated websites was offset by the impact of changes to the timing of deliveries to wholesale partners and softer retail conditions in Ireland. EBIT margins generated by the wholesale and international online operations increased on last year however lower earnings from the Ireland retail stores led to a reduction in total segment EBIT to $2.0m (HY13: $2.4m). Excluding Ireland total International segment EBIT was up 24%. The International segment currently consists of 278 partner locations across 18 markets, 3 retail stores in Ireland and Company operated websites selling product in 6 international markets. The company is exploring a number of franchise, wholesale, and online opportunities for both Pumpkin Patch and Charlie and Me brands across new and existing markets. Central Support Functions Central support costs excluding head office reorganisation costs and foreign exchange movements were 14% lower at $12.9m (HY13: $15.0m) driven by savings from the ongoing review of central support costs. The benefit of the recent reorganisation of Head Office functions will be seen in FY15 in particular lower salaries and wages costs. Including foreign exchange movements central support costs were $12.5m (HY13: $11.7m) Other Financial Information Reorganisation Costs Reorganisation costs of $1.8m were recognised in the period (HY13: $2.6m). Costs included $1.3m of employee related reorganisation costs and $0.5m of impairment and onerous lease charges for 4 underperforming Australian stores identified for closure. Cash Flows and Balance Sheet Despite the challenging trading conditions and the ongoing reorganisation process being undertaken the balance sheet continues to strengthen. Net bank debt at January was down $13m or 19% to $53m (HY13: $66m). Shareholders’ funds were $55m, up 24% (HY13: $44m). The strategic initiatives being implemented will lead to lower working capital and bank debt requirements in future periods. Pumpkin Patch Limited 6 Dividend The Company has not declared an interim dividend however the reinstatement of dividend payments to shareholders is a key milestone in the strategic plan currently being developed. Key focus areas/ outlook for FY14 Strategic Review The Company is currently undertaking a full strategic review of its business units and is updating its long term strategic plan. It expects to be in a position to provide stakeholders with an overview of the strategic plan around June. In the interim considerable progress is being made on a number of key focus areas, many of which will be integral parts of the long term strategic plan currently being developed. These key focus areas are updated below. Supply chain/ procurement strategies • Disruptions experienced in 1H14 reinforced the need to add more supply chain security, flexibility, and capacity to support existing and future business strategies. • Formed a relationship with a leading China based supply agency to increase sourcing options and capacity, and enhance in-market capability. • New suppliers are being added across key product ranges. • Consolidating global logistics providers to improve visibility and timeliness across the supply chain. • Reorganisation of internal supply chain functions and increasing the investment in systems capability. International partners • Multi-brand, multi-channel opportunities with International partners is seen as a significant long term earnings growth generator, merging the company’s current and future brands with partner’s in-market expertise, distribution channels, and customer databases. • Focus is being directed at bedding in new relationships and working with existing partners to take advantage of opportunities for both Pumpkin Patch and Charlie & Me brands. • Reviewing smaller less profitable markets and ceasing relationships where they do not generate an appropriate return or fit with longer term strategies. • Subdued local retail conditions and civil and political instability will continue to suppress growth rates in some markets. Multi-channel and customer experience strategies • Local and international multi-channel strategies will remain an important part of the long term growth plans. • Customer uptake of ‘Click & Collect’ (order online, pickup in store) continues to build across Australasian stores. • ‘E-counter’ (online orders in store, delivery to home) successfully trialed in New Zealand stores and is scheduled to be rolled out across Australia in 2H14. • New transactional websites were launched in August to offer enhanced functionality to improve the customer buying experience. Pumpkin Patch Limited 7 Online • Online sales across Australia and New Zealand were materially impacted by supply chain disruptions. • Future growth plans for local and international online operations will be supported by the product, branding, and supply chain initiatives currently being implemented. • The online business will continue to deliver EBIT margins significantly higher than the retail business units in the long term and will be a major contributor of earnings growth. Charlie & Me • Customer uptake of the brand in store and online continues to build. • The brand continues to deliver local and international sales and earnings growth despite the challenging retail environment. • Currently exploring international franchise opportunities for the brand with new and existing partners, for both online and in store concepts. • Key medium term focus is the development of sourcing and supply chain strategies needed to support the lower margin, lower cost model required for the long term success of the brand. Customer connection • Appointment of Kellie Nathan as General Manager Marketing to lead the development of marketing strategies to clearly define and communicate core brand values into the future. • Major market research program currently underway to determine customer insights and perceptions across the brands and to confirm changing consumer trends. Cost structures • Store and central support costs continue to be reviewed to ensure cost structures reflect future business requirements. • Changes across Head Office have generated approximately $3m in annualised overhead savings. While investment is being made in developing internal capability to support longer term strategic plans, especially in design and marketing functions, the bulk of these savings will be retained. Balance Sheet • Working capital and bank debt continue to trend lower however the full impact of the strategic change process will not be seen until later in FY15 when the major changes have been executed and earnings show meaningful improvement. Current trading conditions Trading conditions across the core markets, especially Australia, are expected to remain challenging for the remainder of the year with high levels of promotional activity continuing to be common place and the higher AUD/ NZD exchange rate impacting the translation of Australian earnings. While the company is only just entering the winter sales season, given current known factors and assuming there is no material improvement in underlying conditions, on balance the company believes there to be more downside risk than upside potential for earnings for the remainder of the year. Pumpkin Patch Limited 8 Summary While current trading results are well below acceptable levels and trading conditions are not likely to materially improve in the short term the company remains focused on making the changes that are necessary for it to improve financial performances from existing operations and to take advantage of considerable local and international opportunities. The change process is not short term in nature and considerable hard work is required across all parts of the business. The company remains confident in the potential of the brands, knows what is needed to be done to maximise that potential, and is embarking on the change process needed to deliver the results that all stakeholders are expecting of the company. Di Humphries Chief Executive Officer Jane Freeman Chairperson Pumpkin Patch Limited 19 March 2014 Pumpkin Patch Limited 9 Reconciliation to NZX Appendix 1 HY14 $000 HY13 $000 Net profit after tax (before reorganisation costs) $1,348 $6,506 Reorganisation costs included within results from continuing operations ($1,842) ($2,218) Reorganisation costs included within results from discontinuing operations $80 ($344) ($1,762) ($2,562) $520 $756 ($1,242) ($1,806) $106 $4,700 Tax effect of reorganisation costs Reorganisation costs (after tax) Net profit (loss) after tax HY14 $000 Net bank debt Interest bearing liabilities: Current liabilities Non-current liabilities Less Cash and cash equivalents Net bank debt Pumpkin Patch Limited HY13 $000 $53,188 $65,735 $25,000 $30,000 $55,000 $25,000 $42,000 $67,000 $1,812 $1,265 $53,188 $65,735 10