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Ted Baker - poor results and worse guidance

Nicholas Hyett | 3 October 2019 | A A A
Ted Baker - poor results and worse guidance

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Ted Baker Ordinary 5p

Sell: 110.30 | Buy: 110.90 | Change 1.90 (1.75%)
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'Very difficult trading conditions', including increased discounting in the retail sector and weak consumer spending means Ted Baker underperformed in the first half.

Ignoring the impact of exchange rates, revenue fell 2.5%. The group reported an underlying pre-tax loss of £2.7m, compared to a profit of £25m last year, as administrative and distribution costs increased 14.9% and 14% respectively.

Trading in the second half has begun slowly, and if unseasonably warm weather continues, management expect second half results to be below last year. Management also warned that 'forward visibility is significantly reduced in these evolving sector dynamics'.

The interim dividend has been cut by 56.4% to 7.8p.

The shares fell 36.2% following the announcement.

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Our view

Ted Baker has two major problems at the moment. Aggressive competition is forcing the group to cut prices to keep revenues stable, while increased costs associated with new distribution facilities is squeezing the bottom line even further.

The result is a loss-making cocktail, compounded by the difficulties faced by Ted's department store concessions and on the wider high street. Some of the extra costs are temporary - stemming from bringing the footwear business in house for example - and some are structural and are here to stay. And the wider retail environment doesn't show much sign of picking up.

There's a slither of light in the relatively stable sales numbers. There's clearly still demand for Ted's products, the company's just not able to convince consumers to fork out as much money as they used to. That's a blow, since Ted's pitch has always been that it can save on advertising, by developing a product that will sell itself. Marketing savings can then be invested back into design. Branding is typically on the light side - which has helped Ted avoid the boom and bust brand cycles that Superdry and Abercrombie & Fitch have endured.

The policy is to pay out around half of earnings as a dividend, which means while performance waxes and wanes, so will shareholder returns. Given the first half was loss-making, any interim dividend at all might be considered a pleasant surprise but that's not going to do much to cheer investors given the scale of the cut.

Overall, Ted has its work cut out. A differentiated product might give the group an edge over its rivals, but revenue is only one half of the equation. We haven't seen demand for Ted's clothes disappear, but we're unlikely to have seen the end of the squeeze on profitability.

Prior to the half year results the shares changed hands for 9.2 expected earnings, 50.6% below the ten year average.

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Half year results

Total Retail sales, including online, were down 4.1% at constant currency to £214.5m. Online sales fell 2.4%, and contributed £52.3m to sales. Increased discounting drove gross margins down to 54.3% (2018: 58.3%).

UK and Europe retail sales declined 3.9% to £141.3m, despite new store openings, with online sales down 3.3%. That reflects consumer uncertainty and tough trading conditions, as well as on-going challenges facing Ted Baker's department store partners.

Unseasonable weather in North America contributed to a 2.3% decline in sales, to £63.7m, partially offset by a stronger online result. Within the Rest of World division, total retail sales were £9.5m, down 17.2% at constant exchange rates, reflecting the closure of several Japanese stores.

The acquisition of No Ordinary Shoes saw Wholesale sales improve 1.8% to £89.3m, however without the footwear boost sales would have fallen 11.7%.

Licence income decreased 13.1% to £9.4m, reflecting the loss of income from No Ordinary Shoes.

The group incurred exceptional costs of £17.4m, which largely reflects continued efforts to restructure the Asian business and ongoing legal charges relating to the former-CEO's conduct.

The footwear acquisition drove net borrowing 6.6% higher to £141.4m. Without the acquisition there would have been a modest decline.

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