Kowhai Retail Group Ltd: What do you do with this request?

// DRILLS / ISSUE 06 / KOWHAI RETAIL

IN HIGHBANK ISSUE 06 · 2026-08-26 · 5 MIN READTHE SENIOR READ — MICHAEL

Kowhai Retail Group

THE CHRISTMAS BUILD

RETAIL · WORKING CAPITAL · DIFFICULTY 2/5

// FACILITY REQUEST

Existing seasonalUS$2.0m

RequestedUS$3.5m

Last peak drawnUS$2.6m (incl. overdraft)

Aged stock heldUS$1.1m

Decision byMid-September — orders ship

You have ten minutes. What do you do?

Read the file

// ONE FILE, THREE CHAIRS

// THE LENDING CHAIR · ISSUE 06

Kowhai Retail Group

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// THE MERCHANT'S CHAIR

The September Ships

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// THE SHAREHOLDER'S CHAIR

Whose Money It Is

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// THE SETUP

Kowhai Retail Group runs fourteen homewares and gifting stores across the North Island — US$31m of revenue, a business that makes most of its year between Labour Weekend and Christmas Eve. Orders are placed with offshore suppliers in September, stock lands October to November, and the seasonal facility bridges the gap between paying for it and selling it.

Last Christmas, the sell-through didn't come. January and February became clearance months, gross margin gave back five hundred basis points, and US$1.1m of last season's stock — 18% of current inventory — is still in the distribution centre. The MD's explanation is specific and not unreasonable: they under-bought the winning categories and over-bought two losers, and this year's buy fixes the mix.

This year's order book is up 22% on last year's. The request: lift the seasonal facility from US$2.0m to US$3.5m before the September orders ship. The relationship is seven years old and has never missed a covenant.

You have the financials. You have ten minutes. What do you do?

// FY25 SNAPSHOT

SOURCE: COMPANY-PREPARED · UNAUDITED · COMPOSITE CASE — FICTIONAL

REVENUE

US$31m

▲ +6% YoY

AGED STOCK

US$1.1m

▲ 18% of inventory

GROSS MARGIN

46%

▼ from 51% (clearance)

THIS YEAR'S BUY

+22%

▲ on an unsold year

OCF

US$0.4m

▼ −60% YoY

Read it against its own stocktakes first: last season's buy was 7% of stock at the FY24 year-end and 24% at the FY25 year-end. The seasonal line is written to be back to zero by the last day of February.

// THE FILE

THREE YEARS OF ACCOUNTS · US$000 · FY23–FY25

FY25 is the year that took in last Christmas; each year-end falls after the February clean-down. Figures in US$000. Operating cash flow is after interest and tax paid; debtor days are on revenue, stock and creditor days on cost of sales. A composite borrower: the accounts belong to no real company.

THE FACILITIES

Seasonal lineReturns to zero by the end of February each year — the covenant that matters. Fully drawn at last season's peak.: NOWUS$2.0m limit · nil at year-end; REQUESTEDUS$3.5m limit
OverdraftDrawn US$0.6m at last season's peak, on top of the seasonal line: a true peak of US$2.6m.: NOWUS$0.75m limit; REQUESTEDUnchanged
Security and covenantsSeven years, and no covenant missed.: NOWGeneral security agreement over stock and receivables; the clean-down; REQUESTEDUnchanged

PROFIT AND LOSS

Profit and loss, US$000, by year.
Line	FY23	FY24	FY25
Revenue	27,600	29,250	31,000
Cost of sales	(13,524)	(14,333)	(16,740)
Gross profit	14,076	14,917	14,260
Overheads	(11,600)	(12,300)	(13,000)
of which store rent	(2,300)	(2,450)	(2,600)
EBITDA	2,476	2,617	1,260
Depreciation	(600)	(620)	(650)
EBIT	1,876	1,997	610
Interest	(90)	(100)	(150)
Profit before tax	1,786	1,897	460
Tax	(500)	(531)	(129)
Net profit after tax	1,286	1,366	331

BALANCE SHEET AT YEAR-END

Balance sheet at each year-end, US$000.
Line	FY23	FY24	FY25
Cash	636	136	136
Receivables	250	270	300
Inventory	3,600	4,450	4,950
Current assets	4,486	4,856	5,386
Store fit-outs and equipment	4,100	4,380	4,130
Total assets	8,586	9,236	9,516
Trade payables	1,700	1,584	1,533
Seasonal line and overdraft (drawn)	0	0	0
Term loan	0	0	0
Total liabilities	1,700	1,584	1,533
Shareholders' equity	6,886	7,652	7,983

CASH FLOW

Cash flow, US$000, by year.
Line	FY23	FY24	FY25
EBITDA	2,476	2,617	1,260
Increase in working capital	(250)	(986)	(581)
Interest paid	(90)	(100)	(150)
Tax paid	(500)	(531)	(129)
Operating cash flow	1,636	1,000	400
Capital expenditure	(700)	(900)	(400)
Dividends	(900)	(600)	0
Term loan drawn / (repaid)	0	0	0
Seasonal line and overdraft drawn / (repaid)	0	0	0
Net change in cash	36	(500)	0

RATIOS FROM THE STATEMENTS ABOVE

Ratios computed from the three statements, by year.
Ratio	FY23	FY24	FY25
Revenue growth	—	6.0%	6.0%
EBITDA margin	9.0%	8.9%	4.1%
Operating cash flow ÷ EBITDA	66.1%	38.2%	31.7%
Debtor days (on revenue)	3	3	4
Stock days (on cost of sales)	97	113	108
Creditor days (on cost of sales)	46	40	33
Cash conversion cycle, days	55	76	78
Total debt ÷ EBITDA	0.0×	0.0×	0.0×

THE REST OF THE FILE · SECURITY · CONDITIONS · CONDUCT · DEBTORS · BUDGET

As the file stood when the request arrived, late in August: FY25 accounts final for the year to 31 March, a stock schedule at the end of August, and management's budget for FY26. What a bank has on file beyond the accounts — enough to write a full credit paper on. A composite borrower: none of it belongs to a real company.

OWNERSHIP, PEOPLE, PREMISES

30% An investment company owned by a family — Came in seven years ago; takes no part in management
25% A private investor — Came in seven years ago; takes no part in management
22% The managing director — Founded the business
23% Eleven other private shareholders — Between 1% and 4% each; most came in seven years ago

Managing director.: The founder; a homewares buyer by trade. Sets the range and signs off the offshore buy each September with the head buyer.
Head buyer.: Runs the category plan and the offshore suppliers; with the business five years.
Finance manager.: Produces monthly management accounts for the directors, and the certificate the bank receives each April.
Operations manager.: Runs the fourteen stores, and the contract with the logistics firm that holds the stock.

Leased, not owned. Every store is on a lease, in shopping centres and on high streets, and the rent is the "of which" line under overheads. The distribution centre is run for Kowhai by a third-party logistics firm on a three-year contract, charged by the pallet stored and the carton moved; that cost sits in overheads outside the rent line. The support office is a small lease beside it.

FACILITIES AND PRICING

Seasonal line: Limit US$2.0m; nil at the FY25 year-end, as at every year-endFloating; 9.0% all-in on drawings through FY25; line fee 1.50% on the limit for the whole year; review fee 0.25%For the Christmas buy. Back to zero by the last day of February each year; annual review
Overdraft: Limit US$0.75m; nil at the FY25 year-endFloating; 11.5% on drawings; limit fee 1.00%; review fee 0.25%On demand; reviewed with the seasonal line

SECURITY

General security agreement: Over the company's stock and receivables, first-ranking, registered when the relationship began in 2019.
The logistics firm's acknowledgement: In writing: the stock it holds is Kowhai's and subject to the bank's security, and will be released on the bank's instruction. Its own claim is limited to unpaid storage charges.
Insurance: Stock insured at cost, with the bank's interest noted; the sum insured is raised for October to January.
Guarantees: None.

CONDITIONS AND REPORTING

The clean-down: the seasonal line at zero by the last day of February, every year. Met in each of the seven seasons since the relationship began in 2019.
A certificate signed by a director by 15 April each year, confirming the day the line reached zero.
Audited annual accounts within 150 days of the 31 March year-end; FY25's arrived on day 121.
Nothing monthly is required, and no stock ageing. The stock schedule in this file came with the request.
No covenant missed, no excess and no payment late since 2019.

THE SEASONAL LINE, MONTH-END BY MONTH-END · LIMIT US$2.00m

AprUS$0.00m
MayUS$0.00m
JunUS$0.00m
JulUS$0.00m
AugUS$0.00m
SepUS$1.30m
OctUS$2.00m
NovUS$2.00m
DecUS$1.80m
JanUS$1.50m
FebUS$0.00m
MarUS$0.00m

FY25. Drawn from late September, when the first sailings were paid for, and at the limit at the October and November month-ends; at the end of November the overdraft beside it stood at US$0.60m, the season's true peak of US$2.60m. Back to zero by the end of February, and nil at the year-end. No excess over either limit and no dishonoured payment.

DEBTORS AT THE FY25 YEAR-END

The debtors ledger by age, with each band's share of the total.
Card settlements in transitOne to two days	US$0.13m	42%
Trade customers, within 30 days	US$0.15m	49%
Trade customers, 31–60 days	US$0.03m	9%
Total, as in the balance sheet	US$0.30m

SALES CHANNELS

StoresFourteen; card and cash at the till: 87%; 86%
OnlinePaid at order; sent from the distribution centre: 6%; 7%
Trade customers — about sixty accountsHospitality groups, corporate gifting and independent gift shops; 30 days: 7%; 7%

STOCK AT COST, BY THE SEASON IT WAS BOUGHT FOR

Current and continuing ranges: FY24 year-endUS$4.13m; FY25 year-endUS$3.77m; End of AugustUS$5.00m
Last season's Christmas buy, still on handAt each date, stock bought for the Christmas before it: FY24 year-endUS$0.32m; FY25 year-endUS$1.18m; End of AugustUS$1.10m
Stock at cost: FY24 year-endUS$4.45m; FY25 year-endUS$4.95m; End of AugustUS$6.10m

The year-end columns are from the stocktakes behind the accounts; the August column came with the request. At the end of August, last season's buy is 18% of the stock held.

THE FOURTEEN STORES

Auckland: Stores6; Sales FY25US$11.70m; Rent FY25US$1.18m
Waikato and Bay of Plenty: Stores4; Sales FY25US$7.50m; Rent FY25US$0.69m
Hawke's Bay, Manawatū and Wellington: Stores4; Sales FY25US$7.77m; Rent FY25US$0.73m
All stores: Stores14; Sales FY25US$26.97m; Rent FY25US$2.60m

Fourteen stores through all three years of accounts. Leases run from two to nine years, most with a right of renewal; the rent column is the store-rent line in the accounts.

THE OVERDRAFT BESIDE IT, AND THE TWO TOGETHER

AprilThe off-season, to August: OverdraftUS$0.10m; Both linesUS$0.10m
May: OverdraftUS$0.25m; Both linesUS$0.25m
June: OverdraftUS$0.40m; Both linesUS$0.40m
July: OverdraftUS$0.45m; Both linesUS$0.45m
August: OverdraftUS$0.45m; Both linesUS$0.45m
SeptemberOffshore orders placed; the first sailings paid for: OverdraftUS$0.45m; Both linesUS$1.75m
OctoberStock lands; trading lifts from Labour Weekend: OverdraftUS$0.55m; Both linesUS$2.55m
NovemberStock lands; the season's peak: OverdraftUS$0.60m; Both linesUS$2.60m
DecemberChristmas: OverdraftUS$0.35m; Both linesUS$2.15m
JanuaryClearance: OverdraftUS$0.20m; Both linesUS$1.70m
FebruaryClearance; both lines back to zero: OverdraftUS$0.00m; Both linesUS$0.00m
MarchYear-end: OverdraftUS$0.00m; Both linesUS$0.00m

FY25, month-end by month-end. The overdraft carries the off-season months; both lines were at zero at the end of February and at the year-end.

MANAGEMENT'S BUDGET FOR THE YEAR AHEAD

Revenue: ACTUALUS$31.0m; BUDGETUS$32.8m — last year's, with the extra buy sold at the FY24 margin
Gross margin: ACTUAL46.0%; BUDGET51.0% — FY24's, with no clearance
EBITDA: ACTUALUS$1.26m; BUDGETUS$3.13m
Offshore Christmas buy, at landed cost: ACTUALUS$4.10m; BUDGETUS$5.00m — up 22%
Stock at the year-end: ACTUALUS$4.95m; BUDGETUS$4.99m — FY24's stock days on the budget's cost of sales
Operating cash flow: ACTUALUS$0.40m; BUDGETUS$2.18m
Capital spending: ACTUALUS$0.40m; BUDGETUS$0.50m — two store refits
Dividends: ACTUALNil; BUDGETNil
Both lines at the peak: ACTUALUS$2.60m, November; BUDGETUS$3.50m, November — the limit requested
Both lines at the year-end: ACTUALNil; BUDGETNil

LAST YEAR'S BUDGET, AGAINST WHAT ARRIVED

Last year's budget against the actual result, line by line.
Line	BUDGET	ACTUAL
Revenue	US$31.8m	US$31.0m
Gross margin	51.0%	46.0%
EBITDA	US$2.92m	US$1.26m
Stock at the year-end	US$4.50m	US$4.95m

WHAT IS STILL NOT IN THE FILE

A real file would also hold these. A paper that says which of them it needs before approving, and why, is reading the file properly.

Last season's sell-through by category, and this season's buy by category. The MD's explanation turns on the mix; the file holds totals.
An independent valuation of the stock: what this season's goods, and last season's, would each fetch if they had to be sold quickly.
The offshore suppliers' terms in writing — what is paid at order and at shipment, and what an order cancelled before it sails would cost.
Store-by-store trading for last Christmas against the Christmas before.
A monthly cash forecast from September to the end of February, the months the line is drawn.

DOWNLOAD THE FILE · XLSX

With the rest of the file above, this one is complete enough for a full credit paper. Write one, and the first three sent in are read free, the way the senior reads here are written — how the pilot works.

// YOUR JUDGMENT

What do you do with this request?

[A]Approve the full uplift — seasonal builds are what seasonal facilities are for[B]Approve the full uplift with aged-stock clearance milestones and weekly sell-through reporting through peak[C]Fund the season at last year's proven level — the increment above it is a merchandising bet, and bets are funded with equity[D]Decline the seasonal increase entirely

This drill needs JavaScript: the options above cannot be selected without it, and the senior banker's reading stays hidden. Turn JavaScript on and reload the page to take the drill.

// THE READING

A seasonal facility funds a loop: cash becomes stock in September, stock becomes cash by Christmas, and the line returns to zero by the end of February. That last clause is the whole covenant — the clean-down is what makes seasonal lending different from term lending in disguise. So before reading a single number in this year's request, ask the only question the structure cares about: did last year's loop close? It did not. US$1.1m of last season's buy is still on the shelves, the line needed the overdraft's help at peak, and the margin line paid a five-hundred-basis-point clearance tax on the way through. Which means part of the US$1.5m "seasonal uplift" being requested is not seasonal at all. It is the unsold past, asking to be refinanced under the season's name.

Now the buy itself. Up 22% on a year that didn't sell, with an explanation — wrong mix, not wrong demand — that is plausible, specific, and completely unverifiable from the file. The MD may be right. Merchants are sometimes right about exactly this. But notice what kind of claim it is: it is a conviction about consumer behaviour four months from now, and the file cannot distinguish a merchant who has learned from a merchant doubling down. Operating cash flow down 60% says the business enters this bet with less cushion than last year, not more. The bank is being asked to fund an increased position on the strength of an explanation for why the last position lost.

The reader's answer is B — full approval with clearance milestones and weekly sell-through reporting — and it is worth being precise about why it fails. Weekly reporting through peak does not prevent a bad Christmas; it documents one in high resolution. If the mix is wrong again, the milestones will be missed in November, when the stock is already landed, paid for, and unreturnable — the bank will hold a beautifully evidenced file about a loss it funded anyway. Conditions that cannot change the outcome are not risk management. They are the bank purchasing the feeling of rigour while becoming the buyer's risk partner with none of the buyer's upside.

The senior banker's read is C. Fund the season — fully, promptly, shaped like the season the business has actually demonstrated: US$2.6m, last year's true peak, with the clean-down covenant intact and the aged-stock proceeds reducing the core as they clear. The increment above that is not working capital; it is a merchandising conviction, and convictions are funded by the people who hold them — through shareholder funds, or through evidence. That second path is the constructive one to offer: if September's confirmed pre-orders from the trade customers convert part of the +22% from belief into demand, the file changes, and the facility can change with it. The MD will call this conservative. It is — precisely as conservative as his own balance sheet is being, and that is the conversation: a bank that funds the cycle is a lender; a bank that funds the bet has become a partner in a gifting retailer, on a lender's margin.

THE NUMBERS THE READING USED

Gross marginP&L · FY24 → FY25: 51.0% → 46.0%; Five hundred basis points given back to clear last season's stock in January and February.
Operating cash flowCASH FLOW · FY24 → FY25: US$1.0m → US$0.4m; Down 60% in a year while revenue rose 6%: the cash is sitting in stock.
Stock at year-endBALANCE SHEET: US$4.45m → US$4.95m; More stock carried out of the clearance months than a year before — and by August, US$1.1m of it, 18%, is last season's.
Last season's true peakFACILITIES: US$2.6m; The seasonal line plus the overdraft's help. The senior read funds exactly this, with the clean-down intact; the rest of the uplift is the aged stock, not the season.
This year's buyTHE SETUP: +22%; Against revenue growth of 6%. The uplift would fund a bigger bet before the last one has cleared.

Every figure above is in the file appendix before the question — open THE FILE and redo it.

A seasonal facility that never returns to zero is not seasonal.

// THE SAME FILE, FROM TWO OTHER CHAIRS

The same file, read by the two people with the most riding on it. Each has one decision to make, and neither has the bank's lever.

// THE MERCHANT'S CHAIR

The September Ships

The bank funded last year's peak and called the rest a bet. The orders ship in September. US$900k of buy is now yours to fund, sell, or cut.

Read from this chair →

// THE SHAREHOLDER'S CHAIR

Whose Money It Is

The bank drew the line between a loan and a bet, and the MD is asking you to fund the bet. Whose money is it? Yours. Now what?

Read from this chair →

// HOW READERS ANSWER

The senior banker's read is [C].

Early days. The distribution appears here once enough readers have answered.

The tempting answer is B. The senior banker chose C. The reading explains why weekly reporting through peak documents a bad Christmas rather than preventing one — and which part of the “seasonal uplift” is not seasonal at all.