A controversial founder axed, a string of profit warnings, dodgy accounting and suspension of the dividend. It’s been an eventful year for Ted Baker (LSE: TED) for all the wrong reasons: its shares are down nearly two-thirds since the start of October and the latest trading update detailing expectations for the key months of December and January made for depressing reading.
Amid this chaos, Ted Baker’s underlying business model is fundamentally proven, and it has a powerful, successful brand to support a recovery in its share price.
Make no mistake, this is not an opportunity for the fainthearted. But for those who can remain calm and measured while the markets try and figure out what is going on, I believe TED is measuring up well as a deep value opportunity.
The changing environment of fashion and retail
Retail has evolved over the last 20 years. It became commonplace for fashion brands to design, manufacture and retail their clothing and accessories, referred to as vertical integration. Brands such as H&M and Zara employ this model very successfully through achieving economies of scale in how they replenish their high-street stores stocks to keep up with fast fashion.
While it might work well for huge, mass market operators like the aforementioned, for a business like Ted Baker it requires significant investment to continue to expand its retail presence independently, especially as its products retail at a higher price point with a reduced variety in lines that require more focused positioning on the high street in more expensive locations.
Back to basics
Ted Baker’s point of differentiation is in its ability to design attractive clothes that appeal to its target audience, not in managing a retail operation.
I see incredible potential in TED’s profitable wholesale business, which deals with large department stores and retailers who stock a variety of clothing lines from multiple brands, meaning retailers shoulder the risk of slow-moving stock and overheads associated with operating a retail business.
This operating segment contributed £65m in operating profits, which represents 40% of TED’s total operating profit. Through reducing its retail presence, TED can focus on returning to its roots as a premium fashion brand. This illustrates the potential areas of expansion, and provides comfort that the path to recovery is by no means out of reach.
Follow the smart money
TED is approaching deep value territory, trading at 0.7 times net asset value (NAV), meaning the book value of its assets are in excess of its market capitalisation.
Since the recent share price collapse, I’ve been encouraged to invest in the near future due to the support of one of the City’s most aggressive hedge funds, Toscafund Asset Management, who gobbled up 12% more shares in early December to become the second largest shareholder, second only to founder Ray Kelvin, who owns around 35% of the company.
On this basis, I believe TED has plunged to its lowest point and investors should pile in before they miss the best deal of 2019!
Dexter Burt 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.