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The Ted Baker share price has crashed: here’s what I’d do now

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The Ted Baker (LSE: TED) share price fell by around 25% when markets opened on Tuesday, after the fashion/lifestyle retailer warned of falling profits.

Management said tough market conditions and product issues are to blame. But with the shares down by nearly 60% over the last year, investors may be wondering how much more bad news is still in the pipeline.

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Here, I want to take a closer look at this former high flyer. Is Ted Baker in serious trouble, or is this a buying opportunity for long-term investors?

What’s gone wrong this time?

Management said consumer uncertainty “in a number of key markets” has led to difficult trading conditions and high levels of discounting this year. Unseasonable weather in North America is also said to have disrupted sales.

But there’s also another issue — the company admits to having faced “some challenges with our Spring/Summer collections.” No details were given, but these problems are said to have been addressed.

The problem for investors is that there’s no indication of how much each of the problems has contributed to today’s profit warning. Underperforming fashion retailers often cite weather or difficult market conditions. But sometimes, the blame lies closer to home.

Blame the old boss – or not?

It’s tempting to say Ted Baker’s problems started with the misconduct allegations in December that led to the resignation of founder Ray Kelvin in March. But in truth, the company was warning of more difficult trading a full 15 months ago.

Back in March 2018, the TED share price peaked at more than 3,200p. A few days later, the firm’s 2017/18 results were issued. These included a warning that “unseasonal weather” had impacted Spring/Summer trading and that conditions were “challenging” in a number of markets.

The shares started falling and had already dropped more than 40% by the time the retailer responded to the allegations made against Kelvin on 3 December 2018. In my view, his problems have had relatively little impact on Ted Baker’s share price. What’s spooked investors is the risk that this long-term growth story may have run into trouble.

Here’s what I think

The problems highlighted in today’s profit warning are remarkably similar to those listed in the firm’s outlook statement 15 months ago.

However, when retailers blame tough competition and bad weather, it sometimes means that they’ve got their product offering wrong. I’m not suggesting that’s the case here, but as outside investors, I think it pays for us to be cautious at this point.

Based on the information in today’s profit warning, I estimate forecast earnings for the current year might now be about 100p per share. With the stock trading around 1,000p, that puts the shares on a forecast price/earnings ratio of about 10, with a forecast dividend yield of 6.5%.

That seems cheap, but I wonder if falling profits could make it hard to justify this year’s forecast 11% dividend hike. I also think that in the absence of any positive commentary, there’s still a real risk that trading will remain poor. I don’t see any rush to buy at this time. For now, I plan to stay on the sidelines and await further news.

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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.

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