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Does this news from Ted Baker boost Next’s share price prospects?

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Ted Baker (LSE: TED) and Next (LSE: NXT) are in the news, and I rate them both highly as well-managed companies.

Ted Baker revealed on Friday that it is to dump Debenhams as an outlet for its range of children’s clothing, ending a deal that’s been ongoing for more than a decade. Debenhams will still sell some Ted Baker items, but the children’s range will end by February next year.

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I’m reminded of the contrast with Superdry, whose waning appeal was blamed by newly-returned founder Julian Dunkerton on its plan to venture into children’s clothing. Do smart young adults want to spend good money on a brand that is also made for children? It’s an intriguing difference in approach, but Ted Baker doesn’t seem to see any problem.

The news

Next is to take over from Debenhams after agreeing a deal “to accelerate the expansion of Ted Baker’s childrenswear collections. Under the agreement, which will run for an initial five-year period, Next will create and sell Ted Baker childrenswear products spanning baby, boys’ and girls’ clothing, shoes and accessories in collaboration with the creative team at Ted Baker.” 

Licensing the brand rather than simply retailing the goods is an interesting option, and chief executive Lindsay Page pointed out that “product licensing is a proven and highly successful pillar of Ted Baker’s strategy to expand as a global lifestyle brand.” Neither company’s share price really moved on the announcement.

The big question is which, if either, of the two stocks would I buy? I’m always wary of the fashion business because it’s down to the vagaries of, well, fashion. But at the same time, I do like a well-managed retailer, especially one that’s handling a downturn well.

Valuations

Ted Baker shares can be had on a forward P/E of around 10, though analysts expect the tough high street environment to push earnings per share down around 16% this year. The dividend is expected to drop too, but we’d still be looking at a solid yield of 5.2%, more than two times covered by earnings. That looks like an attractive valuation, though it is the result of a 58% share price fall over the past 12 months.

Next shares, by comparison, are more highly valued, on a forward P/E of 13 and with a dividend yield of a relatively modest 2.8%. And the share price has been stable over 12 months. Over five years, Next shares are down 20%, but Ted Baker’s have lost 50%.

Fashion risk

I doubt I’d ever buy a single-brand fashion company, because when young people turn away from them for the next popular thing, they can have a very hard time getting back. I was, for example, bearish on Superdry when it was at its peak of popularity and my nephews wore its gear. We’ve seen what’s happened since, and those young men wouldn’t go near Superdry now.

But I’ve always liked Next, and its buying ability that few can match. Next manages to fill its shops every year with clothing that fits the purchasing power of a large portion of the shopping public, and it gets the stuff that people want to wear. Where I live, Next is across the road from Marks & Spencer, and I can’t help feeling M&S’s clothing people are green with envy when they look out from their front door.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Superdry and 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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