Ted Baker (LSE: TED) shocked observers Monday by revealing it had overstated the value of inventory on its balance sheet, putting an estimated excess figure of £20m to £25m on the blunder.
The board said it believes there shouldn’t be any cash impact and that the error relates to previous years, and there’s going to be an independent review of the accounts now, but it sent shareholders rushing for the sell button. The price crashed almost 15% at one point, and was around 10% down by midday.
It’s not been a good year for Ted Baker shareholders, with chief executive Ray Kelvin standing down in March after claims of inappropriate conduct (which he denied). Then a profit warning in June led to the first of 2019’s big price crashes, and that was followed by a further 30% slump in response to first-half figures in early October.
With the shares punished so hard, we’re looking at a prospective P/E of only around six now, and that’s even after allowing for a forecast fall in earnings per share of nearly 50% this year. There’s a dividend yield of 7% on the cards, and because the firm says the accounting error shouldn’t impact on cash, that might be unaffected. So should we be buying for recovery?
I’m very cautions, and the fact that Ted Baker is bringing in a law firm and plans to seek independent accountants too… well, it makes me wonder what other errors might be unearthed. There’s a trading statement due on 11 December, and I say let’s at least wait to see what that says.
Meanwhile, the Boohoo Group (LSE: BOO) share price has been flying, soaring 88% so far in 2019 alone. And at 302.5p as I write, it’s only a few pennies short of the all-time record of 316.9p it set on 24 November.
A number of my Fool colleagues are bullish about Boohoo stock and I do agree with a lot of what they say. Boohoo has done a remarkable job of growing its profits at a time when discretionary spending is facing its biggest squeeze in decades. An EPS of just 0.75p as recently as 2015 had been pushed as far as 4.23p by February 2019, and analysts see growth of 25% per year taking it as high as 6.65p in 2021.
That’s close to nine-fold growth in earnings in just six years, and I do see plenty of potential for more to come, as the online clothing business still has some way to go to maturity.
I think Boohoo is unlikely to be hit by the same problems as ASOS was before it, hopefully having learned from the troubles faced by the market trailblazer — and it’s very often the second wave of entrants into a new business opportunity that profit the most.
So why am I still so very wary of Boohoo shares? It’s really all down to the share price valuation. We’re looking at a forward P/E of 56.7, and it’s been over 60 in recent weeks. That’s very high, though I accept there could be valid justification for it.
But I just don’t think I’ve ever seen a share on such a valuation that did not fall and become available at a significantly lower price not too long afterwards.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. 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.