Interactive Investor

Stockwatch: what to do with Ted Baker shares now?

15th June 2021 11:52

Edmond Jackson from interactive investor

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With impressive share price gains are unwinding, our stock-picker discusses whether to sell up or buy cheap stock. 

After last December’s interim results, I drew attention to “lifestyle items” retailer Ted Baker (LSE:TED) as a ‘buy’ at 117p – with a rationale that a new CEO one year into the role now raised the chances of turnaround success. 

Five years ago, the stock had traded at over £27, but it began 2019 at just £15 and slumped below 300p that year after a catalogue of woe. 

Shares up 80%-plus, but how much is based on hope? 

The company was in public focus over its founder’s culture of “hugging”. Whether that really impacted sales, or if it was a new incoming finance boss writing down stock by £25 million at end-2019, it underlined how Ted Baker was out of control, at least in terms of what is needed to become and stay a leader in high-quality fashion. 

But I took note how it seemed that this competent new finance chief was sorting out costs, and that a global creative director had been appointed from Topshop. A significantly loyal customer base meant the Ted Baker brand offered them genuine value to work with. Early signs of a turnaround were manifesting, if chiefly on the balance sheet and after a dilutive equity issue. But net assets per share around 91p contributed to an interesting risk/reward profile. 

Yesterday, the stock initially rose by 3p in response to annual results to 30 January, closing unchanged at 167p, having hit 212p a month ago. An 80%-plus advance looks to partly reflect a risk-on environment currently. As Covid vaccinations entertain the global economy opening up, investors have bagged all the low-hanging fruit and, in their enthusiasm, have reached out to those less-ripe. 

But the price has slid to 156p since yesterday afternoon, which looks like understandable profit-taking given plenty remains uncertain about Ted Baker. 

Flaming red headline figures were expected anyway 

Revenue for the year to 30 January is down 44% to £352 million – said due to the ongoing impact of Covid restrictions globally. The UK represents 61% of this, the US 29% and rest-of-world 10%. 

An underlying pre-tax loss of £59 million was “mitigated by cost actions” but seems worrying enough, despite analysts having been guided towards a £62 million net loss on £345 million revenue. Such numbers were also foreshadowed by a £39 million underlying interim loss after the first half to end-August had been hit by lockdown. 

A first point about these glaring losses is their hinting at operational gearing should sales recover when people are allowed to socialise more. Yes, “discount” online retailers such as Boohoo Group (LSE:BOO) have thrived during lockdown, but who wants to part with serious money for new clothes and the like until we are properly able to meet others?   

Secondly, this release shows tacit signs of textbook disciplines in a turnaround: £31 million annual payroll savings (albeit 953 jobs gone), £8 million rent savings negotiated, four under-performing stores shut – examples contributing to £24 million free cash flow.  

That £127 million net debt has been transformed to £67 million net cash reflects overall better working capital management, but owes a substantial amount to raising £105 million gross at 75p a share a year ago. Unfortunately, this happening at a relative low point meant 314% dilution of issued share capital which compromises earnings per share (EPS) recovery, although 185 million shares is not nominally high.  

Also boosting cash was the sale of Ted’s London office for £78 million. 

Ted Baker - financial summary
Year end 30 January

  2015 2016 2017 2018 2019 2020 2021
Turnover (£ million) 388 456 531 592 640 631 352
Operating margin (%) 12.8 13.0 11.8 12.0 5.4 -9.5 -28.1
Operating profit (£m) 49.8 59.4 62.5 70.7 34.3 -60.0 -98.9
Net profit (£m) 35.9 44.2 46.6 52.7 24.5 -68.2 -86.4
IFRS3 earnings/share (p) 66.0 80.8 85.1 96.3 44.7 -153 -56.2
Normalised earnings/share (p) 67.5 81.2 95.8 107 114 6.7 -26.0
Operating cashflow/share (p) 56.0 76.0 96.4 80.1 122 180 34.6
Capital expenditure/share (p) 46.9 164 80.0 66.8 55.3 47.2 18.7
Free cashflow/share (p) 9.1 -87.6 16.5 13.4 67.1 133 15.9
Dividend/share (p) 32.8 38.9 43.6 48.9 47.7 7.8 0.0
Covered by earnings (x) 2.0 2.1 2.0 2.0 0.9 -0.9 0.0
Net Debt (£m) 18.8 84.6 95.2 112 124 127 -66.7
Net assets per share (p) 261 320 388 410 417 76.2 82.3

Source: historic company REFS and company accounts

How significant is e-commerce to Ted Baker? 

Annual online sales rose 22% to £145 million, which barely substitutes the stores’ shortfall and could be interpreted as lagging other retailers’ online initiatives. At one point, the results release cites 1.2 million active digital customers but elsewhere is just active customers. Perhaps the marketing mix – smart casual and formal clothes excluding suits – is not well-geared to online: customers would want to physically experience bespoke items that cost more.  

Time will tell as to how online sales trend, and their significance, meanwhile Ted’s market value of around £300 million is well below annual sales anyway. 

A Chinese joint venture business will be interesting to follow, as yet delivering revenue growth of just 6%, if compromised by store closures in the first quarter. New stores are planned for the year ahead and the business is growing rapidly albeit from a small base. A quality Western brand could achieve cult status where a rising middle class is status-driven – recalling how Burberry became a hit in Japan during its 1980s affluent years. 

Mind, that unless you are a fashion marketing guru, it is near-impossible to guess sales trends. Unlike Boohoo.com, we have yet to see consistency from Ted Baker as to meeting, if not leading, fashion needs. 2019’s impression of overvalued and “terminal” stock being sent to charity remains a sore.  

Trading still challenging in new financial year 

Like-for-like revenue in the 12 weeks to 24 April fell 20%, or by 17% at constant currency, but looking back to 2020 the lockdown only began from late March.  

Revenue from stores was down 41%, although ted says: “we are encouraged with how our UK stores have performed since re-opening on 12 April, albeit below like-for like levels”.  

Guidance for the January 2022 year seems for a circa £8 million loss on £470 million revenue.  

The longer-term carrot being dangled is for “a structurally more profitable business with higher return on capital employed also free cash generation.” The chances seem decent enough, given a CEO with a strong financial background and a new global creative director since last November are “bringing a new energy and creative vision to Ted Baker”. 

Licensing has contributed £19 million revenue and is tagged as a key driver for asset-light growth. 

Buccaneering hedge fund still owns over a quarter of Ted

Toscafund has lately trimmed its stake from 27% stake to 26% but remains effectively tied to Ted Baker’s fortunes – as such a stake is quite illiquid unless a bidder materialises. 

I first became aware of this hedge fund, set up by financial stocks analyst Martin Hughes, when it played a blinder backing Hornby (LSE:HRN) over 20 years ago. That stock subsequently went into long-term decline and I do not recall how Tosca exited, also the fund was over-exposed to housebuilders ahead of the 2008 crash. But it has made various successful turnaround calls and its hefty presence in Ted Baker should be seen as a plus. 

Give new management time to work with this brand 

Broadly, if risk appetite generally is sustained, share buyers will appear for Ted Baker on a dip. Or if inflation jitters strike equities, it could suffer from being seen as higher risk. Much will depend on revenue trends as they are reported.  

Yet a new top management team is only one year into a three-year plan, and Ted Baker already scores an “excellent” 4.4 out of 5 stars rating on Trustpilot – a website often skewed towards people complaining. I would give them more time after initial good progress on costs and reducing financial risk. Hold

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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