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Ted Baker - bidder walks away

After a number of proposals to buy Ted Baker in recent months, the group's preferred bidder has walked away...

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After a number of proposals to buy Ted Baker in recent months, the group's preferred bidder has walked away. Ted Baker has said the suitor's decision not to proceed "was not linked to its due diligence review of the Company."

Ted Baker is now deciding whether to proceed with other proposals received as part of the formal sale process.

The shares fell 18.7% following the announcement.

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Our view

Ted's market value has crumpled on news its preferred bidder has walked away. One has to question what caused the about-turn. But ultimately, everything has a price, and with multiple suitors in the wings the doors have been opened to anyone willing to make a serious offer to buy the group. The next few weeks should see the market updated as to whether a suitable alternative deal can be struck. That would be a crucial turning point in the market's assessment of Ted.

Management has previously seemed in no rush to sell the business unless it represents significant value for shareholders. With that in mind, we think it's important to remain focused on the group's wider business case.

After a few difficult years Ted Baker's clawing its way back towards profitability.

A part of achieving that is reducing the amount of discounting. Full price sales are now making up a larger part of the whole, which is not only good news for margins but helps protect the brand. We're also encouraged by the improved inventory management - an area the group's previously struggled with. Keeping a firm grip on stock levels ultimately helps avoid unwanted knocks to profit.

Gargantuan cost saving efforts, the sale and lease back of its head office and the issuing of new shares, means the balance sheet is in much better condition than before too. Ted's also flush with £3m of net cash.

We are genuinely pleased with progress and have fewer immediate concerns about Ted's health. But there are lingering challenges that shouldn't be ignored.

Ted's online presence isn't where it needs to be. It's crucial we see digital activity making up a bigger part of the picture sooner rather than later. Online sales have been affected by the decision to keep prices up, which is the right move in our view. But if the group can't keep inflating the amount of full price items it sells online, it calls the wider appeal of Ted Baker's brand into question. Not to mention the cost of living squeeze that Ted's customers are experiencing means they could start to shop around for lower-priced alternatives.

Digital expansion is in the spotlight because high street footfall is in structural decline. Ted is highly exposed to city centre and department store locations, which are being especially badly hit. Pre-pandemic, 50% of Ted's sales came from city centres.

The longer-term plan is to reduce the group's physical footprint, open new stores in key developing markets like Greater China and the Middle East and focus on a hybrid online/in store approach to selling.

With weddings back on social calendars and offices reopening, headier growth isn't out of the question. Ted's close to having all the pieces needed to complete its turnaround--but it remains to be seen whether they will fit together seamlessly.

If the group's able to pull off this strategy shift, the shares could rerate in their favour. But there's a lot of execution risk ahead. If Ted has to revert back to sale stickers to drive customers to its website, it'll be back to square one. This is becoming more of a concern given the potential for consumers to rein in spending so we'll need more proof the strategy will be successful before turning more positive. It's also worth remembering that the market will remain highly reactive to news of potential offers, or a lack thereof.

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Acquisition update (4 April 2022)

Having previously rejected two acquisition offers from Sycamore Partners Management L.P. a new and improved offer has been received. The group has also been contacted by other parties interested in buying Ted Baker.

The group has now officially invited interested parties to make an offer, hoping to establish whether any are prepared to "to offer a value that the Board considers attractive relative to the standalone prospects of Ted Baker".

Fourth Quarter Results (28 March 2022)

Ted Baker has received, and turned down, two acquisition offers from Sycamore Partners Management L.P.

Sycamore first offered 130p per share on 18 March. After it was rejected the group upped its bid to 137.5p per share, which was also vetoed.

Management said the offers failed to compensate shareholders for future potential saying, ''The management actions taken over the last two years have put the business on a firm footing and it is now well on the way to recovery following a turbulent period.''

Fourth quarter comparable sales rose 35% compared to last year. Compared to pre-pandemic levels, sales were 10% lower until Omicron uncertainty hit, at which point sales were running 42% behind. Sales are also being held back by the decision to limit discounts, to help protect the brand.

Full price sales are growing as a portion of overall sales and the group's on track to meet the financial targets for 2023, laid out in 2020.

For the final quarter, Retail sales were 29.5% behind pre-pandemic levels, with stores down 43.2% and online down 0.9%. Compared to last year, store sales are up over 90%, online's up 2.1%, Wholesale and Licence are up 27.8% and 52.5% respectively.

The group also mentioned that Retail sales growth rates were affected by seven percentage points due to change in operating model relating to the Japanese and Chinese business moving from Retail to Licence and joint venture, and from House of Fraser moving to Wholesale.

The reduction in discounting lowered sales, but has improved trading profit margins. Ted Baker reiterated it will continue to focus on improving full price sales as part of its strategy.

The Group has signed a new franchise agreement in the UK, with plans for at least three new store locations per year over the next three years.

There was strong inventory and stock control in the year and the group expects to report year end net cash of £3m, in line with upgraded guidance.

Find out more about Ted Baker shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 7th June 2022