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Ted Baker - Continued growth amid challenging conditions

George Salmon | 22 March 2018 | A A A
Ted Baker - Continued growth amid challenging conditions

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Ted Baker Ordinary 5p

Sell: 112.20 | Buy: 113.10 | Change 1.50 (1.35%)
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Full year results from Ted Baker show the group made £591.7m of sales, up 11.4% (9.6% at constant currency).

Underlying pre-tax profit increased by 11.7% to £73.5m, with the final dividend of 43.5p bringing the total 2017 payment to 60.1p, an increase of 12.1%.

However, results also brought news of an increase in net debt, and a slow start to the year due to recent adverse weather.

The shares dropped 1.6% on the news.

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Our View

In 30 years, Ted Baker has grown from a shirt shop in Glasgow to a quirky global lifestyle brand. The ethos is to try and present something a little different to the mainstream, an affordable luxury for consumers seeking individuality and indulgence. We see this as an attractive niche in the market.

Almost uniquely for a young fashion brand, the group doesn't do above-the-line advertising. Instead, it aims for a product that will sell itself, with marketing savings reinvested back into the design.

As far as expansion goes, Ted Baker's management leaves the flashy stuff to the design team. The group takes a considered approach with the focus on choosing the right locations, rather than just rolling out as many stores as possible. All the while, online growth has been stellar, and moves to centralise and streamline the distribution process should help improve performance even further.

Successful expansion has seen sales and operating profits grow steadily, enabling Ted to deliver dividend increases every year this century, with a double digit increase in all but in two years in the depths of the financial crisis. The prospective yield is currently 2.3%, and analysts expect further dividend increases from here, although of course there are no guarantees.

However, there are one or two lingering concerns. Ted has flagged more difficult conditions in several global markets, and we can't help but notice in-store sales densities are falling. Full year results also included an unexpected increase in net debt. Net debt's still not much more than earnings before interest, tax, depreciation and amortisation, but it'd be better to see Ted continue its expansion without tying up extra capital.

Nonetheless, we think there's plenty of reasons to be positive. The group only trades from 532 stores, concessions and outlets worldwide, so there should be plenty of room left for growth. This goes some way to explaining why Ted, at 20.3 times expected earnings per share, trades at a premium to many retail rivals.

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Full year results:

Retail, where sales rose 10.4% to £442.5m, remains Ted Baker's biggest division. Growth was driven by a 39.8% increase in online sales, which rose to £101.1m, with further support from a 5.9% increase in average sales space and a 1.9 percentage point tailwind from favourable currency movements.

At constant currency, sales rose 6.4% in the UK and Europe, with a greater proportion of openings in the smaller North American and Rest of World divisions driving growth of 12.4% and 17.3% respectively.

The Wholesale business reported sales of £149.2m, growth of 14.6% (13.3% excluding currency movements). The UK delivered a particularly strong performance. Licencing rose 17.6% to £21.4m.

While the group expects the unseasonal weather to have impacted early sales of the Spring/Summer collection, Ted Baker founder and CEO Ray Kelvin confirmed the new collections have been received positively. Looking ahead, Mr Kelvin said "although we anticipate external trading conditions will remain challenging across many of our global markets, the strength of our brand and business model mean that we remain well positioned to continue the Group's momentum and long-term development."

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.