Shares in fashion retailer Ted Baker (LSE: TED) were down by 12% at the time of writing, after the company issued a rare profit warning.
This latest fall means the stock has lost more than 40% of its value over the last year. Today, I want to ask whether Ted Baker is in trouble, or if smart long-term investors should be buying at current prices.
In a statement on Wednesday, the lifestyle retailer said that adjusted pre-tax profit is expected to be about £63m this year. That’s a fall of 14% from last year’s figure of £73.5m. Analysts’ had previously expected Ted’s profits to be broadly unchanged this year.
The company noted that volatile exchange rates have resulted in a £2.5m loss from currency translation. A further £7.5m of charges have been identified relating to stock write-downs and additional product costs this year.
Management also said all of these items are “non-cash”, which means they shouldn’t affect the company’s cash flow or debt levels. As a result, I don’t expect any change to the firm’s dividend policy.
However, the company’s financial year ended on 26 January, so this profit warning has come quite late, in my view. I’d have thought some of these factors should have been known about sooner than this.
Buy, sell or hold?
Ted Baker shareholders are also still waiting for clarification about the future of the group’s founder and chief executive Ray Kelvin.
He’s currently on leave of absence while the firm investigates allegations of misconduct made against him. Although my view is that the Ted Baker brand is probably big enough to survive any fallout from these allegations, this situation still carries some risk.
Historically, this business has been very profitable. Strong cash generation has supported years of continuous growth with only modest amounts of debt. However, today’s profit warning suggests to me the group’s profitability may have weakened over the last year.
After today’s fall, I estimate the shares are trading on roughly 15 times forecast earnings, with a 3.6% dividend yield. I’m going to reserve judgement until the firm publishes its full results in March. For now, I’d hold.
An overlooked gem?
Daily Mail-owner Daily Mail and General Trust (LSE: DMGT) is an unusual business that’s a little hard to understand. I’ve been guilty of overlooking this firm in the past, but recent news suggests to me it might be worth a closer look.
Last year saw the group receive a £642m cash windfall from the sale of its stake in Zoopla-owner ZPG. This left DMGT with a £255m net cash balance and a number of other profitable operations.
Although it’s best known for the Daily Mail, the company also owns stakes in a number of business-to-business information services and runs trade events. These include a 49% stake in Euromoney Institutional Investor, which is a FTSE 250 company in its own right.
Recent press reports have suggested that DMGT might sell its stake in Euromoney, which could be worth about £700m. In the meantime, the group recently reported a 2% rise in first-quarter revenue and confirmed is previous guidance for the full year.
City forecasts put the stock on a 2019 price/earnings ratio of 17, with a 3.8% dividend yield. I feel the shares could offer decent value at this level.
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.