Shares in clothing specialist Ted Baker (LON:TED) have plunged almost 30% as a tough start to the year has resulted in it issuing its second profit warning in the space of less than four months. The share price has gone under 1000p as a result:
Recanting the past, this share has been a disaster for anyone purchasing upon the first profit warning. Re-reading this makes some quite poor reading, as it was rated as a 4/5. Since that date however, figurehead boss Ray Kelvin was forced out over the furore surrounding allegations of improper conduct. This isn’t the clean break that it suggests, as Kelvin continues to own a large number of the shares.
As we have seen with Superdry in the past, the loss of such an influential figure is perhaps hard to swallow, as they have drifted from profit warning to profit warning. With the direction of the company heavily guided by the original owner, any replacements would have the largest of shoes to follow, and it is even possible that not all employees will buy-in to a new regime.
Ominously enough, the Superdry share performance may hold some clues for Ted Baker. The companies are of comparable size and operated slightly upmarket (although Ted Baker remains a little more upstream). Superdry’s share price has collapsed from almost 2000p to just under 500p today. The fall from grace for Ted Baker is a little less pronounced, but still of no comfort to long-term holders: reaching a high of 3000p just over a year ago, it has lost roughly two-thirds of value. In both cases both shares have been re-rated massively as the market has lost confidence.
The warning comes in a morning trading update. We start:
Ongoing consumer uncertainty in a number of key markets and elevated levels of promotional activity across our global markets have resulted in extremely difficult trading conditions during the financial year to date. The Board anticipates some of these external factors will continue to impact trade for the Group and its trading partners across the remainder of the financial year.
What is notable is how quickly sentiment has changed. Turnover was growing at a fast rate. Could the company be conflating consumer uncertainty with the reputation loss following Kelvin’s behaviours?
There is a financial prediction:
As a result, at this early stage in the year, the Group now anticipates underlying profit before tax1 for the year ending 25 January 2020 to be in the range of £50m to £60m. This reflects the Board’s view of anticipated trading for the rest of the year, the positive impact of new product initiatives and planned cost efficiencies.
The comparable figure for last year was £63m, so at the lower end of this estimate we can see a 20%+ fall.
We are also treated to some other information. Like-for-like sales have declined by 1.1%, and currency movements were adverse. However, revenues are expected to increase thanks to acquisitions, with a strong increase in wholesale.
One might wonder if Ted Baker are entering a new phase of business, with a new direction following the loss of Ray Kelvin. Their comments are not without merit, as it is correct that many clothes retailers are finding the environment difficult. Companies such as Bonmarche, ASOS, Quiz, Moss Bros as well as the previously mentioned Superdry have all put in profit warnings of their own in the past year.
It is fair to say that 2019 was not a good year for Ted Baker, and this was a year that their growth streak came to an end. Turnover went up, but profits fell, indicating that some discounting was in play. Their margins took a large fall from 12.0% to 8.8%, although this is still way above other players (who deal in larger quantities at lower volume). Perhaps Next (LON:NXT) is a good example of a hybrid operator, using extremely good management to cover multiple bases.
Despite appearances Ted Baker has become much more of a womens brand, with this side of the business growing quickly (and conversely, the male side is losing market share). A remark in last years report suggested that an economic downturn disproportionately hits men harder than women as far as clothes go, so given the reasons in this profit warning we can expect this trend to continue.
There are also plenty of adjustments in the profit figures made: £12.1m in the last year. In here many costs are grouped: restructuring costs, legal costs relating to Kelvin, impairment of retail assets. In this fashion, a £62.7m headline profit becomes £40.7m after tax. In some ways we can expect many of these costs to continue. The company has spent heavily on capex, and a prolonged downturn means that it is more likely that more impairments will have to be made.
Dividends have exceeded free cash in most years thanks to these expenditures:
And as a result, the net debt position has gone from a £8.76m balance in 2014 to £123.8m at the last year. So whilst there should be profits after the adjustments this year, if dividends stay the same there will not be much left over to make much inroad into this balance unless capex falls away.
The kind of level of debt becomes slightly more of a worry when a company stops growing, but the balance sheet shows some comfort, the net asset position is in excess of £240m. It should be noted that a large amount of the asset backing is in inventories though, which may be vulnerable to revaluations.
It is rather surprising how quickly this has fallen away. At the time of the last profit warning, I was hopeful for a better entry point. The price has drifted down since then, and even before today there were very good reasons for it, none of which fill you with any confidence.
The company remains profitable, although it remains to be seen if it will have to continue slashing margins in order to produce further revenue growth. It is entirely possible for a brand to drift downmarket somewhat because of this. Since ‘hug-gate’ I am not entirely sure that the Ted Baker brand is not tainted in some way, particularly in womenswear as the previous years results would not have factored this in. It has been true that the press coverage of Kelvin has been relatively mild, and the publicised cases that have come out appear to have been as bad as it gets.
However, it is still early in the year and even with such a wide range of adjusted profit figures, it may be the case that they could be downgraded again as more information comes available. This range gives rise to a wide range of valuations, and taking into account the bottom end of it there still appears to be a fair way for them to fall. If you can accept the upper estimates, then the shares could be good value.
What can’t be ruled out is some kind of future uncertainty regarding management. One of the biggest losers by virtue of shareholding will be Kelvin himself, and further declines may see him wanting back in again against a board which has just kicked him out. Such a battle would be also bad, in the short-term anyway. 3/5.