It has been a traumatic week for the NZX – with two companies – Pumpkin Patch and Wynyard Group – placed into voluntary administration.
(um..!…greed..?…milking by owners..?..is that a reason..?..)
The company was slow to respond to increased competition – particularly the entry of offshore operators into the Australian market – while Pumpkin Patch’s clothing designs failed to keep pace with changing fashion trends.
Two additional issues were its unshakable belief in ‘the brand’ and poor capital management.
Directors and management believed the Pumpkin Patch brand was so strong that it would protect the company from mistakes regardless of their magnitude.
This proved to be an incredibly naive assumption in a competitive commercial environment.
Pumpkin Patch was also capital light.
The original shareholders contributed only $10.9m of capital yet they extracted $61.3m through the IPO process.
This left the company with minimal equity to fund its ambitious expansion plans.
In addition the directors declared dividends of $88.2m in the seven years between 2005 and 2011 – compared with reported profits of $90.6m.
There is a very strong argument that the financial demands of the original shareholders – in terms of the IPO proceeds and high annual dividends – forced the company to fund its aggressive and failed offshore expansion through debt.
This high debt ultimately led to the failure of Pumpkin Patch.