[SharePad] A Special SharePad Investigation: Patisserie Valerie

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11 December 2018
By Maynard Paton

Perhaps the most spectacular share collapse of the year has been that of Patisserie Holdings, the owner of the Patisserie Valerie chain of cake shops.

I am sure you already know the grim story.

To recap, during October the firm confessed to “significant, and potentially fraudulent, accounting irregularities and therefore a potential material mis-statement of the Company’s accounts.

The shares — which had traded at 429p and supported a £440m market cap — have been suspended ever since.

An emergency £15m was then raised by shareholders at 50p a share, while a further £10m was loaned to Patisserie by group boss Luke Johnson.

Before the fraud came to light, Patisserie said its net cash was £28m. Now the group estimates net debt might be £10m.

So, the obvious question:

Could we have spotted Patisserie’s fraud using SharePad?

Simply click here to read my Patisserie Holdings article for SharePad.

Maynard Paton

5 thoughts on “[SharePad] A Special SharePad Investigation: Patisserie Valerie”

  1. Interesting post. I was not a shareholder in Pat Val but was still shaken by what happened as I run a concentrated portfolio and faith in the veracity of the accounts is fundamental. Dressing the presentation of the numbers up (eg ‘underlying’ earnings) is one thing, but outright fraud is another as so hard to detect. I would like to think I would have been clever enough to have spotted it…

    The chapter on working capital in O’Glove’s “Quality of Earnings’ is the one I found most useful, in terms of spotting red flags.

    • Hello Perlican

      Thanks for the note. I reckon many of us would like to think we would have spotted all was not well at PatVal…

      Thanks for the reminder about that book. I have a copy somewhere and I shall have to dig it out.

      I have just read Tim Steer’s The Signs Were There, and he would not have spotted PatVal using the examples cited.


  2. Thanks for your analysis, its the closest I’ve seen anyone come to identifying metrics that might be worth looking at in the future (Z scores etc seemed utterly useless).
    Unlike you, Maynard, I was a customer of this company, and now, I can’t now get a coffee in a Patisserie Valerie store in and around the Midlands, as they are all closed.
    Within a day of KPMG being appointed as administrators, it has closed all the Drucker stores.
    If you remember, I asked Marsh (the CAKE CFO) at the AGM (Dec 2016) what he was doing about the low margin of the Drucker stores and I was told by him to focus on the ROCE instead.
    So within a day of administrators being appointed they have identified 71 stores as non-performing. Presumably, the CAKE management, well certainly the CFO, knew this at the time of the AGM. So, logically it would appear that these stores were kept open to fulfil some other need, and certainly not in the interests of shareholders (the cynic in me says: this was connected with his share options).
    I don’t understand how the administration process goes, but in order to close stores wouldn’t KPMG have had to have some information about whether the stores were loss making or not? Presumably this information must have come from accounts (that we know were fraudulently arrived at), so how did KPMG make their decision within a day? Did they just take the accounts from these stores as gospel?
    If KPMG can identify these stores as non-performing within a day presumably Grant Thornton could have done too. Indeed, if Grant Thornton were in charge of the winding up they would be doing what KPMG are now doing wouldn’t they.

    • Hello Roger

      Thanks for the comment. I am pleased the analysis was useful.

      Yes, I am sure the FD knew about the fraud when you attended the AGM. I can only suppose the stores were kept open to keep the ‘plates spinning’ as it were. I have not really kept tabs on CAKE developments, but sometimes frauds start out small to cover something up, then snowball out of control when the cover up has to be covered up, and so on. I suspect LJ had already asked some outsiders to delve into the accounts in order to give KPMG the gist of what has happened at the time of appointment. Grant Thornton could have done the same investigation during its audits, but back then the FD could misdirect and I suspect nobody at GT even dared think CAKE was a fraud what with LJ etc.


  3. Totally agree with you that ” frauds start out small to cover something up, then snowball out of control when the cover up has to be covered up”.
    -CAKE said that there were “thousands of false entries” in its accounts and there have been rumours in the press that:
    -Bank overdraft’s were obtained by forging Directors’ signatures Suppliers were engaged to supply false invoices
    -Store managers were asked to pay money into non-standard accounts (in some cases their own),

    This all fits with your conclusion that this was a small fraud that grew.

    Yesterday’s Telegraph (https://www.telegraph.co.uk/business/2019/01/28/patisserie-valerie-sales-sliding-three-years-leaked-report-reveals/#comments) sheds more light :

    “like-for-like revenue had been on an accelerating downward slide since 2015, including a 4pc drop in the past two years”
    Steve Francis, the new CEO of CAKE, attacks the way Patisserie Valerie was run in the KPMG documents, saying “the whole business has been run for head office/central production”.
    Now KPMG has found CAKE on course to notch up £2.6m of losses in the year to September 2019 (far worse than initial estimates of annual revenue and EBITDA, of approximately GBP120 million and GBP12 million, respectively).
    In order, to build a true picture of the company’s finances, “‘shoe leather’ was used (by KPMG) in the absence of any reliable financial info”. Investigators collated till receipts for October and November to check against management accounts. However, the KPMG report warns: “There is a significant lack of reliable financial data.” So now they have carried out an old fashioned audit!!

    My learning’s from this:

    1) LFL are essential info to an investor, any company that does not give it should not be considered for investment.

    “Former chief executive Paul May branded LFL sales a bit meaningless”. This was exactly the line he took with me at the AGM in 2016, that I attended, stating that “the company said sales, including new cafe openings, were up 10pc in its last set of audited accounts”.
    I remember not asking about LFL because I had seen that at an analysts briefing (before the 2016 AGM that I attended), Luke Johnson saying categorically that he would not be answering the question. Hence my questions about margin’s particularly at the Drucker and Phillpott’s stores. Clearly, these stores were just left to rot, leading to Francis’s comment in the telegraph article that:

    “Stores are often emptier, closed more and relatively tired/unexciting,”

    2) The fraud was so complete and “competent” that KPMG even after 2 months of “shoe leather” couldn’t be convinced that there was “reliable financial data”. This means that no amount of forensic accounting, Z scores etc, could lead any investor to conclude that CAKE was un-investable. The FO and perpetrators of this fraud have learnt how to trick everyone (including auditors and Luke Johnson). I suppose the cynic in me says that next time they will learn how to fabricate LFL sales as well.

    3) The stores that were viable are still not able to be identified, it might be that a lot of employees are put out of a job needlessly. I would like to see Luke Johnson in front of a House of Commons committee rather like Phillip Green was, to address this issue. I do think that Execs have a duty of care for employees.
    Luke Johnson should be banned along with all the other execs and non execs from being directors of any company for a long time.

    4) A complete overhaul of the Audit community is required. Am I naive? I thought that an audit might consist of going to a store collecting till receipts (as KPMG has now done) and tracking them back to head office. This debacle says that modern day audit does not do this, even for a relatively simple business like a cake shop.
    When I ran my business for my ex, I knew where all the cash and cheques were because I collected them each week and took them to the bank.


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