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Ted Baker - growth slows, shares fall

George Salmon | 4 October 2018 | A A A
Ted Baker - growth slows, shares fall

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Ted Baker Ordinary 5p

Sell: 1,459.00 | Buy: 1,461.00 | Change 11.00 (0.75%)
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Ted Baker's half year revenue rose 5.5% at constant exchange rates to £306m, with Retail, Wholesale and Licencing sales all rising.

However, challenging conditions and unseasonal weather mean the rate of growth isn't as fast as in the past. This, together with higher costs, and a £0.6m write-off courtesy of House of Fraser, meant pre-tax profit fell 3.2% to £24.5m.

The group says the second half "will remain challenging due to external factors".

The shares fell 9% on the news.

The interim dividend rises 7.8% to 17.9p per share.

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Our view

Sales are rising, but that's really a function of online growth and new space. Sales per square foot are firmly in negative territory, and weaker trends in the wholesale and retail divisions don't paint a pretty picture.

These challenges mean Ted Baker shares have fallen from 30 times expected earnings in 2015 to around half that level today.

Still, we don't think investors should be jumping to conclusions about the long-term just yet. Many of the challenges are external, sector-wide issues. It's unlikely such conditions will last forever, and we think there's enough about Ted to suggest it can weather the storm.

The group's consistently impressed during its transition from Glaswegian shirt shop to quirky global lifestyle brand. Its ethos is to 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 invested back into the design. Branding on the garments themselves is typically on the light side - which should help Ted avoid the boom and bust cycle brands like Superdry and Abercrombie & Fitch have endured.

So far, expansion has been tailored nicely, with the focus on choosing the right locations, rather than just rolling out as many stores as possible. Meanwhile, the online operation has delivered impressive growth.

The balance sheet still looks strong despite debt and ticking up after the purchase of the group's HQ in London.

All this has helped Ted deliver consistent dividend growth. Weakness in the share price has pushed the prospective yield up to 2.9% this year. Analysts are confident the group can continue increasing the dividend in the short-term and so are we, although of course there are no guarantees - especially amid these challenging times.

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Trading details (at constant exchange rates)

Retail, the group's largest division, saw sales rise 2.9% to £220.1m. Growth was driven by online sales, which rose 25.7% to £53m. Sales space rose 5.5%, including new openings in London Bridge, Lyon and two in Germany, but in-store sales densities dropped 7.8% to £396 per sq.ft.

Wholesale sales rose 12.8% to £85.9m. This result benefited from the timing of sales, and a strong underlying performance from the UK and North American businesses. Looking ahead, the group expects to report mid to high single-digit percentage growth for the full year.

Licence income rose 11.7% to £10.9m, boosted by several agreements in Asia.

The cost of opening and refurbishing stores, concessions and outlets contributed to capital expenditure of £18.7m, slightly behind the first half of last year. An increase in stock on hand was behind a 20% increase in working capital, which rose to £188.2m.

Looking ahead, the group says its Autumn / Winter collections have been well received, and while conditions look to remain difficult in the near term, it remains confident in the brand's 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 disclosure for more information.