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Ted Baker - new capital required as losses mount

Nicholas Hyett, Equity Analyst | 1 June 2020 | A A A
Ted Baker - new capital required as losses mount

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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: 151.00 | Buy: 152.70 | Change -6.00 (-3.80%)
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In the year ending 25 January 2020 Ted Baker made a loss of £79.9m, compared with a £30.7m profit last year. Much of the loss was attributable to write downs in the value of assets and inventory. On an underlying basis the group made a profit of £4.8m, compared with £63.0m last year.

Ted Baker also announced its intention to raise up to £99.6m by issuing new shares for 75p each.

The shares fell 10.9% 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 coming immediately after the "most challenging" year in its history.

Competitive discounting is a headwind across the sector, and 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.

Coronavirus only makes matters worse. Widespread closures and reduced footfall are going to have an immediate and probably severe impact on already thin profits. Of course, it's too early to say exactly what the damage will be.

The sale of the group's head office and issuance of £100m of new shares is to provide the firepower for management's attempt at transforming the group's rapidly fading fortunes. The new strategy follows the standard blueprint for struggling retailers.

  • Step 1 is largely complete, and involved overhauling the company's leadership, raising new capital and implementing cash saving measures during the crisis. It looks like the group has mitigated any acute short term risks to the business successfully, although it's coming at a cost to existing shareholders.
  • Step 2 is focussed on operational efficiency and cost control. It involves renegotiating with suppliers, reducing working capital such as excess inventory, driving efficiency in logistics and reducing staff costs - both in stores and at head office. There certainly seem to be opportunities here, but implementing these sorts of changes is difficult and not without risk.
  • Step 3 is arguably the trickiest, and involves refreshing the brand. Slogans like "Attract more customers" and "Be 'no ordinary brand'" are vague goals, not practical steps in a strategy. The closest this section gets to anything tangible is a vague sentence on expanding the range and making clothing less focussed on specific occasions. The contrast with the depth of detail given in step 2 is striking. We hope to see more on Ted's creative direction soon.

Overall, Ted feels like a high risk investment at the moment. The shares are very lowly rated, and if the group starts to turn things around they could rerate substantially. There are no guarantees though and if they fail, shareholders could be left with potentially nothing.

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Full year results (changes at constant currency)

Total revenue fell 2.4% to £630.5m, driven by a 5.4% fall in retail revenue to £439.9m. This was the result of heavy discounting across the industry, especially in the UK, which also resulted in the group's underlying gross margin falling from 59.8% to 55.6%. Wholesale revenue rose 8.1% to £171.5m, benefiting from higher footwear sales. Excluding footwear, comparable wholesale revenue fell 5.0%. Licence revenue fell 14.1% to £19.0m.

Underlying distribution costs rose 1.9% to £247.4m, reflecting inflationary cost increases, higher warehouse costs and the addition of the footwear business acquired last year. Underlying administrative costs rose 13.9% to £88.3m, due mainly to higher staff costs and investment.

Ted Baker recognised £84.6m in "non-underlying" costs last year, compared with £32.3m last year. The largest of these were: £32.4m in changes to inventory valuations, £16.2m in asset write downs and £13.5m in revaluations of inventory in respect of strategy changes.

On 25 January the group had £127.1m in net debt, an increase of £3.3m over the prior year. The group has borrowing facilities totalling £205m, which will drop to £133m once the proceeds of the head office sale have been used to repay existing debt. The proceeds from the sale of new shares will be used to pursue Ted Baker's new corporate strategy.

In the 14 weeks between 26 January and 2 May this year revenue was down 36%, although online revenue increased substantially. The group has implemented several cost saving measures, including pay reductions, limiting capital spending and taking advantage of the government's furlough scheme. Ted Baker has begun reopening stores as the lockdown measures ease, primarily in Europe.

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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.