Today I want to take a look at two well-known retail stocks from my watch list. The first of these is high street stalwart Marks and Spencer Group (LSE: MKS). The second is fashion firm Ted Baker (LSE: TED).
I’ll come back to M&S in a moment, but first I want to explain why I’ve become very interested in Ted Baker.
Since mid-March, the share price has fallen by more than 50%. About 20% of this decline has happened over the last week, following staff allegations of inappropriate conduct against Ted’s founder, Ray Kelvin. Mr Kelvin has now taken a leave of absence pending the outcome of an independent investigation. But shares in the firm he founded started to fall long before these stories emerged.
Personally, I think the share price slump is mostly related to the firm’s slowing growth.
Ted’s full-year results in March warned of “challenging” trading conditions. The company repeated this warning in October and again in last week’s third-quarter update, blaming slowing sales on “challenging external trading conditions”.
City analysts covering the stock have cut their growth forecasts steadily over the last 12 months. Their latest estimates suggest sales will rise by just 4.4% in 2018/19, compared to 11.4% last year. Similarly, adjusted earnings are only expected to rise by 2.4%, compared to an increase of 12% last year.
A quality business at a bargain price?
This isn’t great news, but it’s not exactly a disaster. The group’s half-year accounts show that over the last 12 months, it’s generated an operating margin of 11.7% and a return on capital employed of 24.9%.
These are impressive figures for a retailer. They reflect the value of the group’s premium brand, which attracts reasonably affluent customers willing to pay extra for Ted’s distinctive style.
This year’s 50% share price drop has left the firm’s shares trading on 11 times forecast earnings, with a dividend yield of 4.3%. That looks cheap to me.
The only risk I can see is that a scandal involving Mr Kelvin could do lasting damage to the brand. My instinct is that this is unlikely. I’m tempted to add Ted Baker to my portfolio.
Back in the real world
I don’t know about you, but I can’t routinely afford to spend £100+ on a Ted shirt or £60 on a pair of Ted’s carpet slippers. My budget fits better with the clothing offered by Marks and Spencer.
The problem is that even a fashion failure like me can see that M&S style just ain’t what it used to be. Worryingly, I’m starting to feel the same about the group’s food offering, where sales are also sinking. It’s hard to believe this company was once at the cutting edge of convenience food.
A long haul
Chief executive Steve Rowe is working hard to turn round the firm, with the help of chairman and retail veteran Sir Archie Norman. But both men have already made it clear that years of neglect are going to make this a long and expensive process.
Marks’ operating margin has fallen to just 1.5% over the last 12 months, or 6.3% if you’re happy to ignore more than £500m of exceptional costs. That’s less than half the margin achieved by Ted Baker.
Although M&S stock looks cheap and offers a tempting 6.6% dividend yield, I think I’d prefer to spend my investment cash on more upmarket goods.
Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled "The Foolish Guide To Financial Independence", which is packed full of wealth-creating tips as well as ideas for your money.
The report is entirely free and available for download today, so if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?
Roland Head has no position in any of the shares 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.