Patisserie Valerie Downgrades Profit Forecasts Even Further Amidst Fraud

Today’s RNS from Patisserie Valerie (LON:CAKE) appears to be just the latest in the long line of bad news stories for investors. Sadly, this might be the worst of them all, as it turns out that further misstatements were made on its accounts and that there is still no timescale for their shares to become tradeable again.

That will provide no comfort for existing holders, who look certain to face a massive devaluation on the shares. This will be made all the more painful that this was not even a speculative share, and there was no real signs of weakness in the price prior to the bombshell:

Prior to this, Patisserie Valerie could have been considered a massive success. A specialist cake-maker, it was bought out in 2006 and began rapidly expanding, going from 8 shops to 192 in just over a decade. It floated on the stock markets in 2014, raising money to pay down debts.

Its performance was seen as exemplary, providing very good profits and returns for investors, with many attributing it to the premium product offering and tight management of costs. Sadly in October 2018 this was shown to be false, with accounting regularities discovered affecting everything in the business. Money was missing from the accounts, and an almost immediate dilution of shares took place as money was required to keep the firm afloat.

It has been business as usual for the firm even though its shares have been suspended. It remains unclear whether trust will ever be regained.

The Warning

The warning comes today in a company update. No figures are mentioned but it says:

The work carried out by the Company’s forensic accountants since then has revealed that the misstatement of its accounts was extensive, involving very significant manipulation of the balance sheet and profit and loss accounts. Among other manipulations, this involved thousands of false entries into the Company’s ledgers. It will take some time before a reliable trading outlook can be completed while the above work streams progress

The initial indications from the work carried out to date is that the cash flow and profitability of the business has been overstated in the past and is materially below that announced in the trading update on 12 October 2018, which was based on limited work carried out over a 48-hour period.

If we go back to the October 12 trading update this states:

The Directors estimate that based on current run rate information available, annual revenue and EBITDA, before exceptional one off costs, for the year ending 30 September 2019 could be approximately £120 million and £12 million, respectively.

Given what has happened so far, a ‘materially below’ comment could be extremely wide-ranging. Neither could it be ruled out that another update comes out and further downgrades figures. Not that investors can do anything about it anyway.

The Business

It is almost pointless taking any of the historic figures at face value, because we do not know if any of them are true or not. The statement has not pointed out if these irregularities are confined to a single year or if any years results are ‘clean’ – and given the scale of the frauds it seems likely that all its results will be restated at some point.

What is clear is that there is a decent market for selling cakes and hot drinks. The likes of Greggs, Cake Box, Costa all manage profitable operations. No real surprise considering that the mark-up on these items are massive and on a large enough scale profits can run into the millions. Patisserie Valerie offer a slightly modified offering. Average prices for products are higher, but there is greater focus on eat-in products including light meals (as opposed to take-away) and items for special occasions such as cakes.

The last results showed 6 months EBITDA of £13.6m and a cash balance of £28.8m – a truly terrific result considering the challenges of the sector. Given that this was revised down to £12m for a full year really shows the scale of how things have gone wrong.

Taken from the accounts, it appears that in any case growth was slowing:

Of course, the veracity of the figures must be questioned, but the number of stores must appear to be reasonably solid: the large jump in 2013 to 2014 was due to the acquisition of Philpotts which added 23 stores to the portfolio. Since then the growth rate has been rather constant with a high teens number of stores being added per year.

These figures look worrying in themselves: given a constant demand, turnover per store should be growing, not falling. Given that costs such as wages increase year on year, without an increase in turnover, that should put pressure on profits. But this never happened.


It really seems to me that figures were not fiddled not for direct personal gain, but perhaps to protect share prices and the company. The rate of turnover was slowing, and the rate of turnover per store was also slowing – and that’s with incorrect figures, as the company have admitted the real story is even worse than presented here. Being honest and sticking out a profit warning would have produced a massive fall in the share price, but that is the reality of business.

Given the thousands of incorrect entries put onto the books, I would say they would be fairly likely to be sales of fiction processed through certain branches in order to make their figures look better. Thousands of these were needed as people don’t tend to spend tens of thousands of pounds at one go.

It would seem that this must have got through the auditors through sleight of hand: perhaps it was easy enough to pull a story explaining stock discrepancy, and the cash balances could be manipulated. But it was doomed to failure: the truth probably came out when cash was needed and there was none there.

The scale of such irregularities is amazing: the company have said instead of their £28.8m cash balances, they are in a position of debt, and needed an immediate capital injection to continue operating.

One must wonder that in their natural state whether they are profitable at all. An average Greggs store takes just £500k a year (1,854 stores, £960m turnover), with much reduced costs as their units tend to be smaller. The average spend at Patisserie Valerie may be much higher, but the number of Greggs customers would mitigate this somewhat.

It would be interesting to see what what price the Patisserie Valerie shares open up at, I would expect a much lower multiple attributed to it to reflect the previous dishonest and uncertainty, and it seems likely that woes will continue from some time. There would be a reduced cash level to fund expansions and it may well be that some locations where results have been inflated will end up shutting.

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