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Why I think this scandal-hit FTSE 250 growth stock is now a tempting contrarian buy

Following the recent resignation of CEO and founder Ray Kelvin following allegations of misconduct, investors in fashion and lifestyle chain Ted Baker (LSE: TED) could be forgiven for hoping that the next news from the company would be something a little more positive. Sadly, there was little chance of that with today’s full-year results. 

“Very difficult trading conditions”

That’s not to say there weren’t any chinks of light. Despite experiencing what the company described as “very difficult trading conditions,” revenue rose 4.4% to £617.4m over the year to 26 January.

While the UK and Europe still bring in the most sales (£315m), the company also saw a 4.7% rise in the US to £125.7m.

Like many in the retail clothing sector, Ted also saw decent 20.4% growth online to £121.7m, underlining just how important this will be for the company going forward. Wholesale sales also rose — by 4.8% — to £156.5m. 

Over the year, the company opened new stores and outlets (five of the former in the US) and acquired No Ordinary Shoes Ltd. According to interim CEO Lindsay Page, the investments made over the period will ensure that Ted “remains well positioned for long term development” and that management is “focussed on identifying opportunities in the evolving retail market to further expand the brand.”

Unfortunately, all this couldn’t save Ted Baker from reporting a huge 26% reduction in pre-tax profit to £50.9m. This was attributed to widespread discounting in the sector, unseasonable weather, and consumer uncertainty (relating to Brexit)

While this might not have come as much of a surprise — today’s numbers were in line with those mentioned in February’s profit warning — the initial 5% fall to the share price this morning does suggest many suspect tough times will continue. 

With so much negativity around, can the shares be considered a decent contrarian bet? I’d be inclined to say ‘yes’.

Pain is temporary

Before this morning, the stock changed hands for 15 times forecast earnings. That’s clearly a lot less than the average P/E over the last five years (26), according to data from Stockopedia, suggesting that Ted Baker is very much in bargain territory at the moment. 

What’s more, it looks like the retailer is doing what it can to limit the damage following its former CEO’s alleged practice of ‘forced hugging’ came to light in December through the launch of an online petition.

Commenting today, executive chairman David Bernstein reflected that the mid-cap was “determined to learn lessons from what has happened” and that “appropriate changes” would be made.

A 2.5% reduction in the total dividend may feel like pouring salt on the wound, but this doesn’t feel unreasonable given the circumstances. A total cash return of 58.8p per share for the year gives a trailing yield of almost 3.6% based on the share price at the time of writing. That’s clearly less than you can get elsewhere in the market but still adequate compensation while management concentrates on protecting and then revitalising the brand that has allowed it to generate consistently excellent returns on capital over the years.

So, while the short-term picture isn’t rosy (and further share price falls can’t be ruled out), I suspect the company will now be starting to hit the watchlists of many value and/or quality-focused investors. 

If you’re blessed with patience, Ted Baker is certainly worth a closer look, in my opinion. 

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Paul Summers 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.