Is today’s more than 30% plunge from Ted Baker a buying opportunity?

If you are looking for a bargain with Ted Baker plc (LON: TED), consider this.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

In early trading this morning, fashion and lifestyle retailer Ted Baker (LSE: TED) plunged more than 30% on the release of its disappointing half-year results report.

That’s no doubt a blow for shareholders who had previously been attracted to the firm because of its relatively small earnings multiple and high dividend yield. However, I reckon retailers tend to show low-looking valuations when the stock market is worried about the possibility of a cyclical downturn in trading ahead.

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Weak retail markets

Sadly, today’s report suggests that weakness in the company’s markets has arrived as feared. Compared to the equivalent period last year, constant currency revenue slipped back 2.5% in the six months to 10 August. That doesn’t sound like much of a change, but profits have completely collapsed. Adjusted earnings per share swung from almost 44p last year to a loss of 4.5p.

It looks bad, and the directors appear to think it’s dire too, because they slashed the interim dividend by more than 56%. No wonder the share price has taken a dive. And even digging into the figures underlying the headline declines provides little reassurance. In terms of constant currency rates, UK and Europe retail sales slipped back 3.9%, North America sunk by 2.3%, sales to the rest of the world plunged over 17%, e-commerce sales dipped 2.4% and licence income tumbled by more than 13%.

We can cling to one positive figure because wholesale sales ticked up 1.8%. To put that in perspective, wholesale accounted for around 25% of overall sales in the period and the wholesale business delivered around 46% of total operating profit.

Chief executive Lindsay Page explained in the report that significant challenges” are affecting the sector and have contributed to these poor financial figures — things such as weak consumer spending, macro-economic uncertainty, and “the accelerating channel shift towards e-commerce.”  I reckon if the shift to online is listed as a challenge, it suggests Ted baker could be on the wrong side of the trend and behind the curve with its own online business development.

Long-term vision intact

However, the company is battling on with its long-term expansion plans and, during the period, opened a new store in Detroit, USA, and broke into the market in Germany with two new outlets. On top of that, the firm signed two strategic deals to “accelerate growth” in Asia and, after the period ended, it set up a children’s clothing product licence agreement with Next.

Talking of Next, the firm recently released its own half-year figures showing retail profits sharply down but online profits up. Luckily for Next, the firm earns more from e-commerce than from traditional store-based retailing, which led to a slight increase in earnings per share overall.

Meanwhile, Ted Bakers figures suggest the plunge in the share price today was justified, so I see no greater value today than there was apparent yesterday. Therefore, I’m avoiding the shares for the time being.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Ted Baker. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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