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Ted Baker - sales better than expected, but still down

Sophie Lund-Yates, Equity Analyst | 21 July 2020 | A A A
Ted Baker - sales better than expected, but still down

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Ted Baker Ordinary 5p

Sell: 112.70 | Buy: 113.50 | Change 2.50 (2.25%)
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Revenue fell 55% to £60.9m in the 11 weeks to 18 July 2020, ignoring the impact of exchange rates. This reflects a drop in store sales, which was not offset by better-than-expected online trading.

Overall performance has been better than the base case scenario outlined at full year results a few weeks ago. However, this has been driven by increased discounting, which is affecting gross margins.

The continued uncertainty means the group is still unable to provide guidance for the current financial year.

The shares rose 11.5% following the announcement.

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Our view

The whole retail sector has been upended by coronavirus 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 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.

Some positive news is that the group's been able to boost online sales ahead of expectations. We had been worried Ted's higher price tags would have priced it out of the lockdown online shopping sprees, after all why spend big on an outfit no one was going to see? It's also good to hear the group making headway in tightening its clunky buying processes.

Ultimately this should help strengthen the core of the business. But none of this progress is enough to turn the tide yet- and as the economic forecast worsens, there's a real risk even online customers will put off buying Ted's fancier frocks.

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:

  • 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 but 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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Trading details (constant currency)

Within Retail, sales were down 50% at £51.0m. Within that store sales fell 79% to £15.8m, which offset a 34% rise in online sales. Online sales accounted for 69% of sales, compared to 25% this time last year.

As at 18 July 95% of stores around the world were open.

Wholesale and licence revenue decreased 70% compared to the 60% decline expected. This reflects lower ordering levels from stores.

As at 11 July, net cash was £56.7m, which was ahead of management expectations. That reflects the proceeds from the sale of Ted's head office, and the placing of new shares. The group has £161.7m of available headroom on its lending facilities of £108m. An additional £25m will become available from September 2020.

Ted Baker provided an update on progress made against its strategic objectives, including:

  • Improving bought-in margins - the Spring/Summer 2021 collection will be sourced from under 100 suppliers, compared to 150. This will improve buying efficiency.
  • The group has tightened its stock buying processes and improved its payment terms with suppliers. This will improve working capital (the difference between a company's readily available assets and debts due to be paid within a year).
  • For the current financial year, capital expenditure will be under £10m, compared to previous guidance of £15m. Operating costs have also been reduced, including a £15m annualised saving from headcount changes - more than double the expected saving.
  • Rent savings are expected to save £16m this 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 for more information.