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Ted Baker - Kelvin's conduct in the spotlight

George Salmon | 6 December 2018 | A A A
Ted Baker - Kelvin's conduct in the spotlight

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Ted Baker Ordinary 5p

Sell: 1,476.00 | Buy: 1,478.00 | Change 3.00 (0.20%)
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Ted Baker has issued a brief trading update covering the 16 weeks to 1 December. It confirms a negative timing impact on Wholesale, while Retail has been hit by unfavourable weather and the challenges facing department stores, where Ted Baker has concessions. Total sales dipped 0.2%.

However, trends improved towards the end of the period, and guidance for the full year remains unchanged. The shares rose 4.5% on the news.

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Our view

Retail 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 trends are weaker in the wholesale and retail divisions.

Add in the awkward accusations around the CEO's conduct, and it doesn't make for a pretty picture ahead of the all-important Christmas period.

As a consequence, Ted Baker shares had fallen from 30 times expected earnings in 2015 to around 10 times today. That's a rating we've not seen since back in the financial crisis.

Ted's historically commanded a more lofty rating because of its successful 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. That's 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.

To date, 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.

All this has helped Ted build an enviable record of dividend increases. Weakness in the share price has pushed the prospective yield up to 4.9% next year, and analysts are confident the group can continue increasing the dividend in the short-term. We share that optimism, although of course there are no guarantees - especially given the uncertainties around.

Retail conditions should improve given time, but the claims against Mr Kelvin have potential to cause lasting damage to the brand. They also raise questions over the future leadership of the business, which makes the findings of the independent investigation crucial.

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Trading details

Within retail, Ted Baker's biggest division, sales rose 2.3% (2.1% in constant currency) and average retail square footage rose by 5.2% to 427,586 sq.ft. Sales for the last 8 weeks of the period increased 4%, as the weather became more typical for the season.

Online sales rose 18% (15.3% in constant currency), and now account for 30.3% (2017: 26.3%) of total retail sales.

As anticipated, Wholesale sales for the period decreased by 6.5% (7.0% in constant currency) due to a shift towards deliveries in the first half of the year. The group continues to anticipate mid- to high- single-digit constant currency sales growth for the full year.

Complaints have emerged about the conduct of its founder, CEO and biggest shareholder, Ray Kelvin. The group says it has launched an investigation, to be carried out by an independent law firm.

Ted Baker remains mindful of the challenges around, and is 'focussed on making further progress for the full year'.

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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.