Fashion label and retailer Ted Baker (LSE: TED) has been grabbing the headlines for the worst possible reasons in 2018: harassment. The company’s share price has taken a nose-dive since employees complained about founder and CEO Ray Kelvin’s fondness for hugging. This month, the Ted Baker share price fell to its lowest in the past year, down by over 22% from its levels at the end of November, although it recovered a few percent on Thursday after its trading update was released.
The obvious question for the investor is whether the stock should be dropped like a hot potato or is it actually a good time to buy shares of this otherwise sound business? I don’t think the answer is clear-cut.
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Separating the brand from its maker
So far, company management is making the right noises. In a recent release, the top team said that they “take these concerns very seriously” and that the board has directed a “thorough and urgent independent investigation” into the matter.
I am of the view, however, that the real challenge here is that, whatever the findings of the probe, Kelvin founded the brand, is its key driving force and continues to be the biggest shareholder with a 35% stake in the business. This means that if he was found to have acted inappropriately, resolving the situation will not be as easy as asking the CEO to step down and finding another dynamic exec to take over. The brand and the man are intrinsically connected. It can be reasonably expected that Kelvin will want to do what is best for the company as it is in his financial best interests that Ted Baker continues to grow. We have to assume that a resolution to the issue can be expected sooner rather than later.
Financials aren’t half bad
A look at the company’s financials further confirms the sense that putting off any decision will be risky in the present scenario. On an annual basis, Ted Baker has seen a continued rise in both revenues and earnings over the past few years. However, in its interim results announced in early October, the company reported lower earnings compared to last year, though revenues continued to grow.
By themselves, those earnings numbers would not be as big a deal if they were not coupled with some pessimistic guidance. At the time of the results announcement, Kelvin had said that the next part of the year would “remain challenging”, which suggested that financials could continue to show some disappointments and this week’s trading update mixed good news with bad.
While Brexit-related challenges will amplify concerns around consumer discretionary companies like Ted Baker whose products are not essentials, it is diversifying and growing abroad. While it is a very British brand, Ted Baker sourced over 43% of its revenues from international markets in 2017. As an investor, it could be a good bet when attempting to hedge against a Brexit-led recession in the UK in the near future.
Given the company’s latest issues and less-than-complete confidence in its financials going forward, I don’t think it is for the faint-hearted. But it you are an investor with an appetite for moderate risk and quality companies, this could be a winner.