We were certainly taken by surprise on Tuesday when the Ted Baker (LSE: TED) share price crashed by nearly 30%.
The trigger was a profit warning that revealed “extremely difficult trading conditions,” leading to a downgrade in underlying full-year pre-tax profit in the range of £50m to £60m.
What would I do about it? Firstly, I’d look at it in context.
The wider context shows an astonishing 600% share price rise in the 10 years to early 2018. But that’s when the rot set in, and since then the shares have lost a whopping 75% of their value. The company has been facing difficulties for a little while now, and I don’t think it’s simply down to the general retail malaise that’s hitting the high street.
Similar thing
We only need to look at Superdry (LSE: SDRY) as another recent example in the same sector. All the talk of recent months has been about boardroom squabbles and the return of founder Julian Dunkerton as new chief executive, but that has overshadowed the firm’s underlying problems.
Superdry shares have lost very close to the exact same 75% of their value as Ted Baker’s, over a very similar timescale. Sure, Superdry’s planned move into a range of children’s clothing was probably a bad one for the brand — I doubt 20-something fashion followers want to be thought of as wearing kids’ stuff.
The underlying and unavoidable thing is that fashion changes, and the more specific a fashion brand’s fan base, the more damage that can be done to it when that happens.
I’ve always been bearish about Superdry, even (perhaps especially) when the brand was what everyone wanted and the shares were soaring.
Single brand
I confess I’ve rarely looked at Ted Baker, but at the back of my mind I’ve generally thought of it as a more stable company with a longer pedigree. But I’ve never considered buying the shares, because I’ve always considered single-brand fashion companies to be very risky.
Some make it to the top and stay there for decades, but they tend to be the more upmarket and global ones. Burberry is one that I’ve always admired for its ability to appeal to a wide range of global audiences, and it’s especially appealing in Asian markets where there’s a strong (and quite long-established) liking for British high-status products.
But even Burberry is going through a relatively rough patch, and its shares are down around 25% since late 2018’s peak, so there really does seem to be at least some general sector weakness.
What should we do?
Superdry shares are very lowly valued based on forecasts, with forward P/E multiples of only around nine. The big problem is that we really have no idea where the company is going next. And fundamentals for Ted Baker are up in the air now, and I can’t even think about a valuation until I see revised forecasts.
But my strengthening feeling towards troubled companies is that I should keep well clear until I’m fully convinced that all the bad news is out (which I doubt it is with either company) and that a solid recovery is on the cards.
And I’d never buy a single-brand fashion stock anyway.