annual report 2012 - Pumpkin Patch investor relations

chief executive officer’s reportWith the challenging trading conditions we encountered in 2012, weembarked upon some significant changes across the business. While thesechanges impacted a large number of our team members and required significantreorganisation costs to be recognised the changes were necessary for us to refocusourselves on our core markets, our core strengths, and to focus on developinginitiatives that will deliver improved financial results for shareholders into the future.Despite the challenging environment our Australian sales were up 4% andNew Zealand sales were up 3% driven by very strong online sales growth andpositive sales growth from our retail stores. We encountered increased promotionalactivity and higher product costs, mostly cotton related, and as a result gross marginswere impacted. However later in the year margins improved due to lower productcosts and higher import exchange rates.A major highlight for me in 2012 was the growth seen from our global onlinebusiness. Sales exceeded $30m and earnings exceeded the EBIT generated by allof our New Zealand retail stores combined. This is a major milestone and a sign ofthe growth potential and scalability of our online model. Our online sales in Australiaare the equivalent of around 11% of our retail sales which is approximately twice thatof the average Australian retailer.One of our key focus areas is the development of multi-channel strategies. Themerging of the traditional retail and online models is only just beginning howeverwe believe we are ahead of the pack and will retain that position as we continue toinvest in technology and supply chain capability. These multi-channel strategies arevery much aligned with the changing consumer demands and will ultimately lead tous servicing our customers better.While we are expecting increased revenue from most International markets in localcurrency terms in the coming year the continued high NZ dollar will negate much ofthis growth. We are currently looking at a number of new international franchise andonline opportunities for both Pumpkin Patch and Charlie & Me brands however anynew markets will take time to generate noticeable earnings.We are becoming a true multi-channel operator. Having a strong Australasian retailpresence, a rapidly growing international online operation, and the opportunitiesfor our international wholesale/franchise business model gives us so much flexibilitywhen looking at growth options. Couple this with the dual brand Pumpkin Patch/Charlie & Me strategy and you open up a lot more opportunities.During 2012 we managed inventory a lot better and we were disciplined withcapital expenditure. As a result inventory was considerably lower than last year at$61m and net bank debt is also lower at $55m. With better trading performancesin 2013, good control over inventory, costs, and capital expenditure we areforecasting bank debt to further reduce over the coming year.Neil Cowie13