Patisserie Valerie: the Great British rake-off

Patisserie Valerie has shocked the markets with an accounting scandal, prompting a bailout from chairman Luke Johnson. Marina Gerner reports.


Pat Val no longer looks so tasty
(Image credit: Credit: FotoPulp / Alamy Stock Photo)

The stockmarket has "got used to regular high-budget dramas from the likes of Carillion and Conviviality," says Oliver Shah in The Sunday Times. But even by these standards, the collapse of Patisserie Valerie has been "truly extraordinary". Early last week, it was worth around £500m and supposedly had around £30m in cash. Then the group suddenly announced there was a huge hole in the accounts, a result of "potentially fraudulent accounting irregularities", and it needed animmediate bailout.

It owed around £10m, which had been borrowed through overdraft facilities set up with HSBC and Barclays without the knowledge of the board, the auditors and executive chairman Luke Johnson. Johnson, who holds 37% of the stock, has now loaned the group £20m to stave off collapse. The company's finance director has been arrested and released on bail. Pat Val is also raising £15m by selling newly issued shares to investors. But as Jim Armitage points out in the Evening Standard, only institutional funds were sold shares at 50p; "ordinary punters had no such luck". The stock was suspended last week at 429p.

This may not be too hard to clean up, according to Aimee Donnellan on Breakingviews. If someone stole the money, Johnson's cash should rectify the problem and things can get back on track. However, the rescue will be more convoluted if "the actual operating performance has been inflated": annual sales almost doubled in the four years to September 2017.

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Time to audit the auditors

Time will tell, but in the meantime, the spotlight has fallen on the auditors. Pat Val is contemplating legal action against Grant Thornton, which "gave it a clean bill of health in its most recent financial statements", says Oliver Gill in the Daily Telegraph. The Competition & Markets Authority (CMA) is currently investigating the "broken" audit market. About time too, says Nils Pratley in the Guardian. Auditors were never properly held to account after the financial crisis; "the mood now seems to be turning".

"One mooted solution is to create a fifth serious player" by encouraging smaller firms to merge, says Shah. That would tackle the dominance of the Big Four PwC, Deloitte, EY and KPMG which audit 99% of the FTSE 100 and 98% of the FTSE 350. Grant Thornton is the market's number five, and could be combined with other mid-tier players. But just look at Grant Thornton's track record.

Last year it was fined £3m over its audits of Salford University and Vimto manufacturer Nichols. Last year the Financial Reporting Council said it should have been more sceptical of information given by the board of AssetCo, a fire-engine leasing business. The basic problem in the sector is "audit quality, not competition".

Superdry: the wrong kind of weather

There are some people who "put on a parka as soon as a cloud appears in the summer sky", says Bloomberg's Andrea Felsted. "Unfortunately for Superdry, there aren't enough of them." The clothing retailer's shares have fallen by more than a fifth after a profit warning.

Annual earnings are now expected to be around £90m, down from an initial estimate of £110m. The group cited "unseasonably hot weather conditions", a problem that apparently continued into October, with sales of jumpers and jackets particularly badly hit. Warmer clothes account for 45% of Superdry's sales and their margins are higher, which means most of the profit depends on them, says Matthew Vincent in the Financial Times.

"Clothing retailers complaining about the warm weather has become an annual autumn event," says Nils Pratley in The Guardian. Last year itwas Next, now it's Superdry. The company may be planning to reduce its reliance on "heavier-weight products", but it would surely have been sensible to have embarked on that process more than five months ago.

Investors were also rattled by £8m in unexpected additional foreign exchange costs. Losing £8m from forex hedges is "sloppy", notes Pratley. Hedging currency riskis "basic stuff for clothing firms with international expansion plans".

The profit warning, and especially the "less effective hedges, will call into question the management's credibility once again", says Felsted. The market will be worrying that we could be returning to "the bad old days of multiple profit warnings". Superdry has a lot of work to do.

City talk

US households "are saving Wall Street's bacon", says John Foley on Breakingviews. JPMorgan and Citigroup's results show that consumers are unfazed by political turmoil or talk of a trade war, and are continuing to borrow with gusto. US consumer credit has hit a record $3.9 trillion, while credit quality looks stable; the proportion of card loans unserviced after three months has stayed steady. Buoyant consumers are making up for the banks' "lumpy" investment banking results. The boom won't go on forever, but owing to rising wages and tax cuts, "itcan go on for a while".

Paddy Power Betfair has been fined £2.2m by the gambling industry regulator for failing to stop bets with stolen money, says Angela Monaghan in The Guardian. The betting group did not carry out adequate anti-money-laundering checks, and it also failed to intervene when customers displayed signs of problem gambling. An investigation by the regulator revealed that two customers were allowed to gamble "significant sums" ofstolen money. One of them was the former boss of Birmingham Dogs Home, Simon Price, who spent money with Betfair that he had stolen from the charity.

Sacha Romanovitch, CEOof Grant Thornton, hasstepped down. After discussions with the board itwas made clear that she nolonger had the support of senior officials at the firm, says Harry Wilson in The Times. Romanovitch's departure ends a 24-year stint there. It comes amid suggestions of infighting over her alleged lack of focus on driving up profits. According to some leaked internal documents a group of dissenting partners accused Romanovitch ofharbouring a "socialist agenda" and pursuing a "higher social purpose" rather than looking after thebottom line.

Marina has a PhD in globalisation and the media from the London School of Economics, where she worked as a teaching assistant on the MSc Global Media. In 2014 she was invited to be a visiting scholar at Columbia University's sociology department in New York.

She has written for the Economists’ Intelligent Life magazine, the Financial Times, the Times Literary Supplement, and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany. She is trilingual and lives in London. She writes features and is the markets editor at MoneyWeek..