PATISSERIE HOLDINGS (CAKE)

[Dod101]

I am not an investor in Patisserie, or an accountant, or even a customer. But I had a look at the 2017 annual report. Total stated income was £114m from 198 shops plus a single bakery supplying other similar businesses. So excluding the bakery, that was an annual income of £575,758 per shop, or £11,072 per week. Was that credible, from selling coffee and cakes? I don't think so. Assuming an average spend of £7.50 per customer (an expensive cake and a coffee), that suggested each outlet served 1,476 customers per week or 211 per day. In my view, those figures would have been literally unbelievable.

That is of course the point I was making, or rather the point that the UKSA article was making. I hate being cynical, but you need to ask what on earth the auditors were thinking about when signing off that sort of thing. Better, maybe we should be asking what sort of training auditors get these days, or, maybe even better, what use these international standards of audit are?

Auditors apparently just plug in numbers to some sort of algorithm and if it comes out OK they sign off. Folks who read my scribbling will know that I am very keen on looking at the culture of companies and that should also be required of auditors. That is far more important than looking at the numbers. If they can trust the management the numbers become a box ticking exercise to look for the odd mistake. Fundamentally can they trust the management or not. In my professional life (I was not an auditor) I always sorted out the wheat from the chaff in my mind. Then I knew who I could trust and who not.

Dod

[ADrunkenMarcus]

you need to ask what on earth the auditors were thinking about

Or even if they were thinking.

Best wishes

Mark.

[XFool]

Before:

https://www.sharescope.co.uk/philoakley_article32.jsp

Something was flagged up:

"Are the company's profits believable?
...
The Beneish M-score is a formula used to spot companies that might be manipulating their profits (to read more on this formula click here). According to the M-score in SharePad, Patisserie Holdings profits might be being manipulated."

But he didn't believe it!

and after:

https://knowledge.sharescope.co.uk/2018 ... e-valerie/

“One of the last of my stocks I expected to have this problem”
By far the most remarkable feature of Patisserie’s fraud was that nobody saw it coming.

The Beneish M-score huh? Might pay to get acquainted?

https://www.sharescope.co.uk/philoakley_article14.jsp

https://en.wikipedia.org/wiki/Beneish_M-Score

[Pendrainllwyn]

I am not an investor in Patisserie, or an accountant, or even a customer. But I had a look at the 2017 annual report. Total stated income was £114m from 198 shops plus a single bakery supplying other similar businesses. So excluding the bakery, that was an annual income of £575,758 per shop, or £11,072 per week. Was that credible, from selling coffee and cakes? I don't think so. Assuming an average spend of £7.50 per customer (an expensive cake and a coffee), that suggested each outlet served 1,476 customers per week or 211 per day. In my view, those figures would have been literally unbelievable.

A glance at the waistline of the average Brit suggests someone is eating cake!

I completely agree this type of common sense check is worth doing and might help one avoid investing in a fraudulent enterprise. Maybe I lack common sense and these numbers are incredible. A quick review of their menus (which I did when researching the stock) indicates they sell celebration cakes for 30 quid or so and wedding cakes sell for 100-200 quid. No idea how many they sell a day but a few sales would increase average spend. Some of their shops have a broader offering serving breakfast, lunch and dinner which would create more revenue than a slice of cake and a coffee. Their main courses and specialty sandwiches all retail for more than 7.50 (unless you go for the soup) plus you might get a starter, dessert or a drink - a glass of Prosecco will cost you 5 quid and I doubt everyone stops at one. At my office people regularly buy large batches of luxury cakes in individual portions in bulk for their colleagues for birthdays, leaving gifts etc. Presumably people also buy cakes in larger orders for events in their personal lives for Mother's Day, Anniversaries, Birthdays, visiting family and friends etc. Finally they also sell cakes online too (4% of revenues in 2017) - you can create your own cake online. So I wonder if 7.50 is a realistic assumption. Could well be higher.

I looked at the stock because ADrunkenMarcus (if I remember correctly) had disclosed it as one of his holdings and I liked a number of his other holdings. The numbers that we now know were cooked looked good. With that done, before I buy the stock of any company that has a product my family would be familiar with I ask them what they think of the product. My wife loves Patisserie Valerie from her days in London so I will confess my finger rested firmly on the buy trigger more than once. If the stock had been a bit cheaper I would probably have bought.

Pendrainllwyn

[ADrunkenMarcus]

That the accounts could have been fraudulently represented to the degree that now seems inevitable here is, frankly, something that astonished me. This company had millions in cash in the bank and that should have been *very* easy to check upon. And if they had that cash, without equity raising or debt, then that came from operations and indicated a successfully growing company. They initiated a dividend and grew it in strong double digits. For me, their cash pile - and the speculation of special dividends(!) - was a key attraction. (I recently did a brief analysis in the portfolio review forums of my dividend growth portfolio, looking at my companies' net cash positions.)

Some key financials were as follows:



Even these operating margins were actually way below many other holdings I have, but while they seemed high (a table in Phil Oakley's article had a comparison) they did not seem unbelievable. It is quite difficult to see any similar public company with a directly comparable business model.

Common sense checks as described are valuable. I thought their cakes were expensive but that people were buying them. The celebration and wedding cakes, concessions in Sainsbury's and other lines were, I thought, likely to be very profitable. I know someone who orders loads of their 'create your own' cake designs online for collection. Having said that, the business was not solely Patisserie Valerie's brand. It will be interesting to see if we ever get a true picture of what was happening.

I had a holding in my pension (c. 5% of the portfolio) which I sold in August 2018 at 416p, after a 10% or so CAGR for three years. My concerns were more sector-specific, including consumer spending, worries about cost increases and such like and whether they could keep up their margins. A smaller (proportionally) holding in my dividend growth portfolio amounted to 1.7% of the portfolio at the last year end, of which almost all will be written off - I suspect. At least it was one of my smallest holdings. I am more angry with myself for selling one holding and not the other!

Best wishes

Mark.

[ADrunkenMarcus]

[Source/Credit: Mark Brumby, Langton Capital - quoted verbatim http://www.langtoncapital.co.uk ]
PATISSERIE HOLDINGS – FURTHER UPDATE:

Today’s announcement:

• CAKE has announced that it ‘is still in discussions with its bankers to extend the standstill of its bank facilities beyond 18 January and will issue an update when those discussions have concluded.’

• As 18 Jan has passed, suppliers etc will be interested to know whether payments are being honoured by the banks in question.

• The current fragile state of affairs cannot persist for very long. VAT and wage payments etc may need to be made over the next few days.

etc

[langley59]

Contrary to what I thought previously it seems that the nature of the fraud here may have been the payment of suppliers out of undisclosed bank accounts which were overdrawn, neither the expenses nor liabilities being in the accounts, and this going back over years. Presumably there are many small suppliers across the country and this is why the fraudulent transactions are said to be in the thousands.

[dspp]

"Paul Mumford at Cavendish Asset Management, which pumped an additional £100,000 into Patisserie Valerie as part of a £15m rescue-fundraising deal in November, said he had significantly written down the value of the company’s investment after last week’s statement.

He said it would not be a “massive surprise” if the cake company had to call in administrators. “The talks going on are quite critical. It is very disturbing they are going on after the standstill has run out.......

Chris Boxall at Fundamental Asset Management, another shareholder, said he was disappointed that the company had not provided clear guidance on its debt situation or an update on trading: “This is pretty extraordinary and pretty awful.

“We are still no closer to understanding the position of the banks and why the banks are still involved given the injection of funding [by shareholders]......

...... “all options”, which could include a second bailout by Luke Johnson, the multimillionaire chairman of the business, a sale or administration. Johnson pumped £20m of his money into Patisserie Valerie to keep it afloat but was repaid £10m of that sum after other shareholders later put up the £15m of new funds.

It has emerged that Johnson’s remaining loan is likely to be repaid ahead of other creditors if Patisserie Valerie does go into administration.”
"

https://www.theguardian.com/business/20 ... nformation

[PinkDalek]

"Paul Mumford at Cavendish Asset Management, … said it would not be a “massive surprise” if the cake company had to call in administrators. “The talks going on are quite critical. It is very disturbing they are going on after the standstill has run out...

4:51 pm

https://www.investegate.co.uk/patisseri ... 51058074N/

22 January 2019

Patisserie Holdings plc

Company Update

Patisserie Holdings plc (AIM: CAKE) ("PH" or the "Company") announces today that, as a direct result of the significant fraud referred to in previous announcements, it has been unable to renew its bank facilities, and therefore regrettably the business does not have sufficient funding to meet its liabilities as they fall due.

As a consequence, the Directors have appointed partners at KPMG as administrators to the Company and its various subsidiaries. ...

Then read on re Luke Johnson personally extending his unsecured, interest-free loan.

[ADrunkenMarcus]

It's basically a complete wipe-out for equity holders, I think.

I do hope that they can save as many jobs as possible for the poor staff.

Best wishes

Mark.

[dspp]

Ditto, hopefully some of the staff jobs can be saved. Will there be a pre-pack ?

I still expect a class action to come forwards.

regards, dspp

[langley59]

It looks suspiciously like someone was inflating the profits to cash in on options granted to management. If so hopefully someone will go to prison.

[ADrunkenMarcus]

Suck on this!

https://www.youtube.com/watch?v=u-SqkiDSwMI

Best wishes

Mark.

[UncleEbenezer]

Any of you have cake, I hope you ate it while you had the chance!

I half-contemplated a flutter when I heard (on the news) about the owner personally stumping up in what sounded like a vote of confidence. Glad to have stayed clear.

A glance at the waistline of the average Brit suggests someone is eating cake!

My very ample waistline might be misleading your prejudices there.

[SteMiS]

Ditto, hopefully some of the staff jobs can be saved. Will there be a pre-pack ?

I still expect a class action to come forwards.

regards, dspp

It's gone into administration

https://www.investegate.co.uk/patisseri ... 51058074N/

Patisserie Holdings plc (AIM: CAKE) ("PH" or the "Company") announces today that, as a direct result of the significant fraud referred to in previous announcements, it has been unable to renew its bank facilities, and therefore regrettably the business does not have sufficient funding to meet its liabilities as they fall due.

As a consequence, the Directors have appointed partners at KPMG as administrators to the Company and its various subsidiaries.

[PinkDalek]

It's gone into administration ...

Echo viewtopic.php?p=195632#p195632

[dspp]

Apparently the Jan salaries loan will/is £3m.

https://www.theguardian.com/business/20 ... cafe-chain

"Chris Boxall at Fundamental Asset Management, another shareholder, said the collapse of Patisserie Valerie was “absolutely disgraceful”. He said he was considering launching legal proceedings and wanted to encourage other shareholders to join in.

“You can’t have a business making £30m squeaky clean in September supplying coffee and cakes disappearing before February,” he said. “This is ridiculous ... in a system that is supposed to be robust. Where are the directors? Just enjoying lunches and cakes?"

- dspp

[77ss]

Apparently the Jan salaries loan will/is £3m.

https://www.theguardian.com/business/20 ... cafe-chain

"Chris Boxall at Fundamental Asset Management, another shareholder, said the collapse of Patisserie Valerie was “absolutely disgraceful”. He said he was considering launching legal proceedings and wanted to encourage other shareholders to join in.

“You can’t have a business making £30m squeaky clean in September supplying coffee and cakes disappearing before February,” he said. “This is ridiculous ... in a system that is supposed to be robust. Where are the directors? Just enjoying lunches and cakes?"

- dspp

I have fortunately avoided this company, but I was interested in FAM's take on events. Link below. Its difficult enough to see incompetence (before the event) - when there is also the possibility of fraud, what hope does the small investor have? My sympathies to holders.

http://www.fundamentalasset.com/investe ... -holdings/

[Alaric]

- when there is also the possibility of fraud, what hope does the small investor have?

Someone earlier in the thread suggested an fairly obvious method.

The business would buy in cakes from bakers at wholesale prices and (hopefully) sell them on at retail prices to make a profit.
But what if the payments to bakers came from accounts hidden from the auditors? That would inflate profits by removing expense from the P&L. This could continue until such time as the bankers blew the whistle on the overdrafts that would have been created.

[dspp]

"Luke Johnson, the multimillionaire chairman of collapsed cafe chain Patisserie Valerie, has extracted more than £40m from the business since the cafe group floated on the stock market less than five years ago....

Johnson, who bought Patisserie Valerie in 2006, sold nearly £23m of shares when the company floated in 2014 and nearly £13m a year later and has also collected dividends and a £60,000 a year salary. There is no suggestion that the entrepreneur was involved in any fraudulent activity. He has loaned the company a net £13m in recent months, most of which is unlikely to be paid back.

Former chief executive Paul May took out nearly £11m in share sales, pay and dividends, including more than £2.6m in profits on sales of share options last year, according to Guardian research. Former finance director Chris Marsh made more than £4.4m including profits of £2m on share options in 2018.

... The administrators running the collapsed cafe group said they are “hopeful of a positive outcome” for the remains of the business even though more than a third of its outlets have already closed with the loss of 920 jobs."

https://www.theguardian.com/business/20 ... eet-london