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Ted Baker - majority of stores now closed

Sophie Lund-Yates, Equity Analyst | 23 March 2020 | A A A
Ted Baker - majority of stores now closed

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Ted Baker Ordinary 5p

Sell: 135.20 | Buy: 135.90 | Change -7.00 (-4.92%)
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Due to coronavirus the majority of Ted Baker retail stores and concessions are now closed. However, the group believes it's on track to reach pre-tax profit of £5-10m for the full year ending 26 January 2020, and online trading has been stronger year-to-date. The group is unable to provide guidance for 2021.

Ted Baker also announced the sale and leaseback of its head office. Net proceeds from the sale of £72m will be used to pay down debt.

The shares fell 14.3% following the announcement.

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Our view

We worry about what coronavirus could mean for Ted Baker. The whole retail sector has been upended by the disruption, but Ted's more vulnerable than most.

Prior to the pandemic it admitted the previous year had been the "most challenging" in its 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 fixed costs associated with running a bricks and mortar retailer to contend with, and the net effect is one of unravelling profits. The challenges mean Ted suspended the dividend, even before the recent disruption.

Coronavirus will make problems even worse. The widespread closures and reduced footfall is going to have an immediate and probably severe impact on the already thin profits. Of course, it's too early to say exactly what the damage will be.

And if the pandemic results in a long-term economic slump once shops start to reopen, people could be even less inclined to part with the amount of money Ted's price tags demand. That puts further pressure on prices and margins would suffer.

The group isn't in the best position to stomach a further weakening in trading, because it's carrying more debt than is ideal. If profits keep shrinking it will make paying down interest more difficult. The sale of its head office should help here, but it's not a cure-all.

There are some bright spots however.

It's encouraging to see digital sales faring better. And prior to the outbreak the group reported positive trends in North American digital sales, suggesting there's still an appetite for Ted's fashion. It also 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.

At the time of writing the shares change hands for 4.8 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. We said last time that would involve the new CEO finding a way to bolster margins. As long as current conditions last, we think that's going to be a very difficult, potentially impossible, task.

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COVID-19 update

384 Ted Baker locations are closed out of a total 416 locations globally, representing 68% of sales. In the year-to-date online sales have increased 16%, but performance has been more varied over recent weeks.

There has been minimal disruption to supply chains with the majority of Chinese factories now operational.

In order to preserve cashflow the group's suspending all non-essential capital expenditure, stopping discretionary operating expenses and "severely" restricting travel. It's also exploring opportunities to reschedule or reduce payments with third parties including HMRC.

Ted Baker paid UK business rates of £6.2m last year, and welcomes the government decision to halt business rates for 12 months.

The group has increased its borrowing facilities by £13.5m.

Sale and leaseback details

Ted Baker has exchanged contracts for the sale of the entire issued share capital of Big Lobster Limited, for a cash consideration of £78.75m.

Big Lobster Limited is a wholly owned subsidiary of Ted Baker, and owns the group's head office: The Ugly Brown Building. The cash consideration represents a premium of around 39.1% to the last published book value of the property.

Ted Baker has agreed to lease The Ugly Brown Building for a short period, but at completion has the option to enter a long-term lease on part of the adjacent newly developed property: "Bowline".

The Short-Term Lease on The Ugly Brown Building will appear as a right of use asset worth £9.2m on Ted Baker's balance sheet, along with an associated lease liability of £9.2m.

If the group decides to exercise the option of a long-term lease on Bowline, the lease will last up to ten years. It will also receive £8m in reduced rent over the period. If the long-term lease isn't exercised, this will be paid as a cash sum once the short-term lease on The Ugly Brown building is complete.

Ted Baker founder Ray Kelvin, who owns 34.87% of the shares, has agreed to vote in favour of the sale, which still requires shareholder approval.

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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.