Patisserie Valerie – Yes, It’s Worse, Possibly It Never Made A Profit

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Patisserie Valerie announced that there was an oopsie in its accounts back in the autumn, an oopsie which led to the shares being suspended, an emergency capital raising and a hope that all would be well once the matter was properly investigated. That turns out not to have been quite the operative situation. They’ve come back now and said that matters were worse than they thought.

We are not privy to any special or new information here but we can indeed still form a view. It’s entirely possible that the chain just never was making a profit. Isn’t now either. And if that’s true then there’s no value to it either. Our suspicion is that this is the real situation too.

Patisserie Valerie, the cafe chain which came within hours of financial collapse in October after discovering a multimillion-pound gap in its accounts, has uncovered “thousands of false entries into the company’s ledgers”. In a statement to the Stock Exchange, the company, which operates 200 cafes and employs 3,000 staff, said work carried out by forensic accountants had revealed that “the misstatement of its accounts was extensive, involving very significant manipulation of the balance sheet and profit and loss accounts”. The company said it was now clear that the cash flow and profitability of the business had been overstated in the past and was “materially below” the numbers the company provided when the accounting black hole first emerged in October.

Hmm, well, yes:

The chain, which is chaired by Luke Johnson and operates 200 outlets in the UK, was pushed to the brink of collapse when it revealed the gap in its accounts. Trading of its shares was suspended and Chris Marsh, its chief financial officer, was arrested and subsequently released on bail. Mr Marsh resigned in October, while Paul May, the chief executive, left in November. Mr Johnson helped put in place emergency funding to keep the business afloat, providing two £10 million loans.

Quite. As we said back at the time:

So, the true health of the business is the cash in the account, minus the bills we’ve already received and know we’ve got to pay in a bit, but pay after the end of this accounting period. So, now, how do you run a fraud in these accounts? Not that this happened at PV, heaven forfend, what did must wait for the inquiry and court cases. Well, what you do is have the FD sit on some vast pile of invoices that are either marked as paid in the accounts but cash hasn’t gone out, or even as never received. That means that we’ve that cash in the bank and a small pile of bills to pay in the future, without taking into account that £40 million of bills sitting under the FD’s cushion or down the back of his sofa. Now take that one step further. We’ve a business which has, allegedly, just suffered this sort of problem. Vast debts no one knew about suddenly turn up, as they always do in such cases for eventually people do demand their cash. We’ve a £40 million problem of something that looks very like this type.

That’s a reasonable outline of what allegedly happened. But what’s the implication of that?

Ouch. Now, it depends what has happened there. If the FD has walked off with it then that’s one thing. Criminal and all that but. But what if the company simply never has been making the money it has been reporting? That this is the accumulation of all those years of reporting profits when there were none?

We seem to be getting closer to an admission of that last, don’t we?

It’s possible – unlikely perhaps, but possible – that there simply aren’t and haven’t been economic profits at Patisserie Valerie. At which point, what value in it surviving?