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Ted Baker - guidance cut and CEO resigns

Nicholas Hyett | 10 December 2019 | A A A
Ted Baker - guidance cut and CEO resigns

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Ted Baker Ordinary 5p

Sell: 110.20 | Buy: 110.60 | Change 1.70 (1.56%)
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Ted Baker has reduced expectations for the full year, and now believes pre-tax profit will be between £5m - £10m. That reflects poor November and Black Friday trading.

Following the challenges, the group has decided to suspend the dividend.

CEO Lindsay Page has also resigned, with CFO Rachel Osborne becoming Acting CEO with immediate effect.

The shares fell 16.1% following the announcement.

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Our view

By its own admission, the last twelve months have been the "most challenging" in Ted's history.

One of the biggest challenges is discounting across the sector, not helped by the recent import of Black Friday. The demise of the department store is a particular problem for Ted given its large number of concessions. Then there are the associated fixed costs associated with running a bricks and mortar retailer to contend with, and the net effect is one of unravelling profits.

But Ted has compounded the difficult macro-conditions with specific operational foul ups. Poor inventory control meant assets were overstated by £20 - £25m, and that's led to wider questions about credibility.

With the dividend now suspended, and senior management out the door, investors would be forgiven for asking what happens from here.

Fortunately there's some evidence the brand still has legs. Digital sales in North America are growing strongly, which suggests demand for Ted's clothes is far from dead. It helps that the group traditionally spent little on above the line advertising, investing in design instead. That means branding is typically on the light side and has helped Ted avoid the boom and bust brand cycles that Superdry and Abercrombie & Fitch have endured.

However, UK and European sales still account for the lion's share of profits, and getting things moving in the right direction will take time and cost money.

The shares change hands for 5.9 times expected earnings, which is significantly below its longer term average. That reflects concerns over Ted's ability to get over the sizeable bumps in the road. Managing that will involve the new CEO tightening a grip on operations, and bolstering margins somehow. When all's said and done, Ted's not down and out, but we're unlikely to have seen the end of the squeeze.

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Third quarter trading update (constant currency)

Total group revenue was down 3.9%, at £203.8m, and gross margins are below expectations, largely due to discounting.

Retail sales declined to £143m, down 5.5% after excluding the recent acquisition of No Ordinary Shoes. Trading was impacted by weaker consumer spending in the UK, and increased discounting in the sector, despite a 5.2% increase in average square footage within the retail estate. Online sales declined 1.4% and represented 31% of all Retail sales.

Wholesale sales rose 0.6% to £60.8m, but this reflects the timing of sales. Full year sales in the Wholesale division are expected to fall by a mid-high single-digit percentage.

Looking ahead, the group expects difficult trading conditions to continue, including through the key Christmas trading period. In response Ted has launched an external review to assess costs and its business model, and is also reviewing its asset base.

David Bernstein has stepped down as Executive Chairman with immediate effect, and a search for his successor is underway.

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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.