Every investor loves an iconic brand: something interesting, quirky, different, and with an identity that is difficult to replicate and makes consumers keep coming back for more.
Ted Baker (LSE: TED) used to be one of these companies, but with the world of clothing retail going online, it is coming under increasing competition from the likes of Boohoo.
It is hard to sell cool, and the fashion and clothing industry is an area in which I am even more cautious than normal. Trends come in and out of vogue. What was stylish last season is taken off the rails less than a year later. Success can often be the downfall of a fashion brand, too. If everyone has the same handbag, then is it stylish or ordinary? Unless you can remain relevant, buyers will always look for the next great thing.
The company’s stock price has dropped by around 36% year to date. Over the previous five years, the results are even worse, with the shares decreasing in value by just over 46%. When compared to the sporting retailer JD Sports, the results for shareholders are even more disappointing. With a year-to-date increase of over 80% and the shares up just shy of 700% over a five-year period, the difference is staggering. What is going so wrong with Ted Baker?
In May the retailer reported profits for the year would be between £50m and £60m, far short of the £72m analysts were expecting. This caused the share price to crash, with a price-to-earnings ratio of under 11.
Retail conditions have been challenging for this industry. Added to that, the group’s previous chief executive officer resigned in March following allegations of misconduct made against him. Lindsay Page has now taken over the role. With over 20 years experience at the company as a finance director, he should know the company inside out.
With the valuation as it stands, is now a good time to buy?
Tightening the belt
The business cut its dividend by 2.5%, but in the circumstances I do not think the action was unreasonable. I would rather see the money effectively pumped back into the company at this stage, rather than returned to investors.
The news wasn’t completely bleak. Although profits before tax and exceptional items decreased by 14.3%, the group revenue actually increased by 4.4% to £617.4m.
Ted Baker positions itself as a global lifestyle brand. The group recently signed a licensing deal with Japan’s Sojitz Infinity to sell its products in department stores in Japan effective at the start of October. This will bring the total of the company’s retail license partners to 17 and broaden its global reach.
The group is also planning to open stores in Antwerp and Hamburg, with further concession stores in Germany. Another store is planned for Detroit, with concession openings and licence partner concessions are planned for Mexico. All of this costs money, which will not help the bottom-line in the short-term.
The shares could be worth picking up for what could be a bargain, but I’d rather invest my money elsewhere for now.
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T Sligo has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group 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.