An already tricky year for Ted Baker (LON:TED) today got a little worse as the fashion retailer warned on 2019 profits. The share price movement was a little bit restrained and fell 15%, but we are still above the level reached upon ‘hug-gate’:
Most people would be aware of Ted Baker – a high-end British clothes company which has been a success story over the years, from humble beginnings from a shop in Glasgow to today being an internationally recognisable brand. It has expanded well outside of the UK with stores and concessions all over the world.
Recently, this has been in the news for all the wrong reasons, with the long-standing CEO and founder publicly stepping down from the company amidst allegations of improper conduct. At the moment, this seems restricted to uncomfortable ‘hugging’ as opposed to anything that may cross the line into illegal, but investors may be nervous, as a reputation of a company can be tied to that of one man.
Notwithstanding this, investors have had a good ride out of TED. There is a long history of dividends, and the performance of the business has been good, with a steady increase of profits without resorting to margin cutting. The share price has almost trebled since 2012, so any long-term holders would have been likely to have seen some very healthy capital gains into the bargain.
The RNS steps around this, terming it a ‘update to profit expectations’. We begin:
Ted Baker, the global lifestyle brand, updates on profit expectations for the financial year ended 26 January 2019 (“Year 18/19”). Profit before tax is now expected to be in the region of £63m; this is before previously announced costs associated with the ongoing independent external investigation, exceptional costs relating to the previously announced debtor balances owed by House of Fraser and the acquisition of No Ordinary Shoes Limited and No Ordinary Shoes USA LLC and other non-cash impairments relating to retail assets. The net borrowing position for Year 18/19 remains in line with prior expectations.
We don’t hear what these original expectations are. A broker note from Liberum (available on Research Tree) shows that PBT was anticipated as £74.3m, so this is a decent-sized miss on the face of it.
Helpfully some reasons are given, and they are all non-cash:
1. Foreign exchange movements in the final week of the financial year, primarily GBP/USD and GBP/EUR, have resulted in a mark-to-market profit impact of approximately £2.5m relating to the translation of inter-company balances;
2. As previously reported, we have upgraded our systems and made process enhancements during the year. These systems upgrades have allowed us to identify additional product costs of approximately £2.5m that arose during the second half of Year 18/19. We are confident the systems upgrade now provides robust controls to prevent a recurrence; and
3. The recent systems and warehousing transitions in Asia and the US, as well as a more prudent view on aged stock, have resulted in an unanticipated write-down in the value of inventory of approximately £5m. Ted Baker remains fully committed to driving improvements in the net working capital to sales ratio and will provide an update at the full-year results presentation.
Forex exchange seems a reasonable explanation, although the second two arguably should have been happening anyway.
There was a note on debt:
The net borrowing position for Year 18/19 remains in line with prior expectations.
Broker notes show this as net debt position of £127m.
Prior to the recent allegations, it was very easy to be bullish on Ted Baker. Their last trading update was good, with retail sales up 12% and e-commerce up 18% – this coming on a backdrop for a very poor year for clothing in general: companies such as Bonmarche, Moss Bros, Quiz, and Superdry all struggling on the retail side of things and issuing profit warnings of their own, some more than once.
Some of this might be explainable by the market positioning: Ted Baker sits at the premium end of the market, but not ultra-premium (their clothes can be picked up in department stores and they have a line of cheaper suits sold by Moss Bros). They are less susceptible but not immune from a market downturn.
These are great figures that any retailer would not mind:
Everything moving in the right direction, and this so-called ‘mature’ brand delivering a great increase in profits and turnover, and the holding of the margin indicates that scale can be had without discounting. Demonstrably the brand holds value both at home and overseas.
However, Stockopedia is more bearish on the stock and it has a current Stockrank of just 36 (and classified as a ‘Falling Star’). It has no problem with the Quality (which gets a 75 rating) but more so the value (which is just 36). The valuation is punchy relative to others – industry giant Next trades on a multiple of around 10, but features none of the growth. It is almost as if the perception that the growth here is about to run out, but you wouldn’t think this is the case from the brokers: 2020 estimates show turnover of £791m and PBT of £90m.
Debt at Ted Baker has increased rapidly over the past few years. The main culprit of this was a £58m purchase of its office headquarters – financed by debt. This now sits on the balance sheet as a property asset, but there are now finance costs to be paid. There is also a burgeoning overdraft which sat at over £75m at the year end, which goes towards the net debt figures.
There appears to be a decent level of capex here: £36m was spent opening and refurbishing stores, as well as investing in IT systems. The debt facility has a limit of £135m. The level of dividends is also high: last year cost the company £25m. An additional £31m was spent on working capital as the growth in operations meant that more stock has to be held.
However, the ratio of debt to profits here is low and not a cause for concern, short of a disastrous trading season.
There seems to be a lot to like about Ted Baker: the brand is demonstrably strong despite allegations about the owner, and their track record in delivering has been excellent. Fashion is not an easy game at the top end, and their range of products seem to be managed very well. The company also has gained a world-wide following.
If the numbers could live up to analyst estimates, then this becomes a great value proposition. It is clear that the company are investing heavily for the future, with investments into the back-end and stores.
Some of the reasons given for the profit warning are troublesome: for example the new IT system that discovered £2.5m of costs, would these have gone undiscovered? It seems unlikely. Also unlikely seems that aged inventory should have an unanticipated write-down. It may be the case that the market for the old items is weaker than expected, which does not bode well for future items when they get old.
Analysts seem fairly bullish that these hiccups have no impact on the long-term fundamentals, and it seems difficult to argue with that. The price seems to present a decent upside.
One point is deducted as the company could easily have given an update on current trading today which may have reassured the market: together with the uncertainty on the owner means that there potentially could be a lower entry point in future. 4/5.