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Ted Baker - pre-tax losses widen

Sophie Lund-Yates, Equity Analyst | 7 December 2020 | A A A
Ted Baker - pre-tax losses widen

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Ted Baker Ordinary 5p

Sell: 142.40 | Buy: 143.10 | Change -0.50 (-0.35%)
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Group revenue fell 46.2% in the first half, to£169.5m, reflecting the impact of Covid restrictions on trading. Higher online sales were unable to offset the losses in physical stores. The group's underlying loss before tax worsened from £2.7m to £39.0m. Including extra non-underlying costs, including impairment charges, restructuring and inventory costs, pre-tax losses were £86.4m.

However, Ted Baker also said its cost cutting programme and balance sheet position are ahead of expectations.

The ongoing uncertainty means there will be no interim dividend.

The shares rose 4.9% following the announcement.

View the latest Ted Baker share price and how to deal

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 severe impact on already thin profits. But there are Ted-specific issues that make current conditions even tougher. Ted Baker is geared towards occasion wear, which is precisely what people don't want during an era of social-distancing. Gross margins have also suffered more than others. The group didn't have the best handle on inventory before the pandemic: when it was forced to close, Ted already too much stock, which it had to discount in order to sell.

Some positive news is that the group's been able to cut costs faster than planned, is making headway on improving its buying practices, and online sales are in positive territory. We're also encouraged by the stronger balance sheet.

Ultimately this means Ted has a foundation to stand on now. But the core problems haven't been fixed just yet. Cost cutting can't happen forever, and won't stop further pain if Ted Baker clothes don't fall back in favour with customers.

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.
  • 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. This will involve making the clothes less focused on specific occasions. The right idea, but we'll need to see more specific action before feeling more positive.

Ted Baker has made some steps in the right direction, and the shares could rerate substantially if the strategy shift works. But the systemic issues still exist in our view, and a lack of dividend means shareholders aren't being paid to keep the faith - and if Ted fails to turn itself around, shareholders could be left with potentially nothing.

Ted Baker key facts

  • Price/Sales ratio: 0.5
  • 10 year average Price/Sales ratio: 1.4
  • Prospective dividend yield (next 12 months): 0.0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half year results (changes at constant currency)

The non-underlying charges against pre-tax losses included £45.8m in non-cash charges, relating to the write down in value of PPE and right-of-use assets. There were just over £10m of costs relating to the restructuring and redundancy programme, as well as £6.1m of inventory changes in estimates. These charges were partially offset by a £17.6m gain in the disposal of Ted Baker's head office (The Ugly Brown Building).

The decline in overall revenue largely reflected a 42.5% fall in retail revenue to £124.0m. Of this, £74.2m was online revenue, which grew 41.1%. Wholesale revenue fell 56.1% to £39.5m, while Licensing revenues dipped 36.6% £6.0m.

Revenue is being held back by depressed demand, as well as increased discounting across the sector. Ted was particularly vulnerable to cutting prices because it already had a lot of excess stock as the pandemic hit. The group is also particularly exposed to occasionwear, which has seen very weak demand since lockdowns. As a result, underlying gross margins fell to 50.3% from 55.7%, which is behind the group's plan.

Underlying operational expenditure reduced 28.8% to £174.6m, as Ted Baker furloughed staff and took advantage of government support packages. As part of the previously announced "cost out" programme, the group thinks it can recognise £31.0m in annual central and retail store cost savings.

The sale of The Ugly Brown Building and issuance of £105.0 of new shares means Ted Baker had net cash of £60.8m as at 8 August, compared to net debt of £127.1m in 2019.

Rachel Osborne, CEO, said: "our financial statements for the first half of the year do not yet reflect the progress we have made on execution against our strategic plan" and that she expects it will take 12-18 months for any improvements to be visible in the financial results.

Find out more about Ted Baker shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.