I think it’s fair to say most investors were shocked by how bad last week’s results were from fashion and lifestyle retailer Ted Baker (LSE: TED). I know I was.
The buisness plunged to an underlying pre-tax loss of £2.7m for the six-month period to 10 August, compared to a profit of £25m for the same period last year.
The Ted Baker share price followed suit, falling by 40% on Thursday and, at the time of writing, a further 15% on Friday. TED shares have now fallen by about 70% in 2019 and are trading 85% below their 2015 peak of 3,555p.
Is it time to buy? It’s tempting to think the shares must now be cheap. But chief executive Lindsay Page said “trading in the second half has started slowly.” Page also said retailers are “discounting at unprecedented levels” and warned of “significantly reduced” visibility.
Having taken a closer look at last week’s accounts, I’m worried this situation could continue to worsen. I’m not convinced that TED stock is a bargain.
A fashion flop?
We know conditions are tough for retailers, but Ted Baker’s dire first-half performance suggests to me its latest ranges might have flopped with customers.
Excluding the impact of exchange rates, sales fell by 2.5% during the first half of the year. But the group’s sales per square foot fell by 9.3%. That suggests to me both new and existing stores are performing poorly.
Another concern is a big reduction in gross profit margin, which measures sales prices against product costs. Ted’s gross margin fell from 43.4% to 37.6% during the half, reflecting higher costs and lower sale prices.
Based on H1 trading, I think there’s a real risk of a full-year loss here. That’s a dramatic reversal for a firm which, until 2018, generated healthy double-digit operating margins.
Can Ted’s finances take the strain?
Fashion firms sometimes have bad years. A one-off miss isn’t the end of the world, assuming the company’s finances are strong enough to absorb any losses. If Ted Baker bounces back next year with new designs and a return to sales growth, the shares could be a bargain at current levels.
Unfortunately, I’m starting to get concerned about its financial situation. Based on the firm’s performance over the 12 months to 10 August, my calculations suggest it’s taking Ted Baker about nine months to turn over its stock. That seems very slow to me. My sums show that the equivalent figure for Next is 2.4 months. For luxury brand Burberry it’s six months.
Slow stock turnover means more cash is tied up in stock. It also suggests high levels of discounting may be required to shift old items and make space for newer ranges. For a retailer, this is bad news.
Against this backdrop, Ted Baker’s net debt has been rising steadily in recent years. I feel the combination of weak sales, rising debt, and slow-moving stock, poses a significant risk to shareholders.
Although sales and profits could bounce back next year, we’ve no way of knowing how likely this is. In my view, the uncertainty surrounding this business makes it a stock to avoid… for now.