We all know businesses are set to struggle in the coming months. The coronavirus, and more specifically the lockdown and self-isolation it has brought about, is going to hit companies large and small.
I believe that in most cases, the market sell-off we are seeing is an opportunity. Of course, we need to pick the companies that can and will recover. We need to be wary of the ones that were struggling even before this latest crisis.
Unfortunately, clothing store Ted Baker (LSE: TED) falls into this category. Its share price dropped more than 90% over the past 12 months, as poor sales numbers and accounting miscalculations have taken their toll.
The company today confirmed that interim CEO Rachel Osborne, who took over three months ago after Lindsay Page resigned, is named the permanent chief executive. Osborne previously worked as CFO at Debenhams, where she helped steer the company through a restructuring – something she seemingly intends to do again.
Osborne said that despite coronavirus concerns, she has “put together a clear plan to transform Ted Baker”. This seems likely to be easier said than done, however.
Previous CEO Page resigned after the company reported its fourth profit warning of the year. The company also had to carry out an operation review after identifying a £25m accounting error. This resulted in an admission that stock had been overstated by some £58m.
Accounting errors are always cause for concern – financial reports are, after all, the very basis for investors to value a company. If we can’t trust the numbers, confidence in the stock as an investment soon fades away.
To clarify, I don’t think Ted Baker’s accounts are at the stage that lack-of-confidence yet. I believe that a turnaround in the company’s fortunes would be possible – under normal circumstances. Unfortunately, of course, these are not normal circumstances.
As I see it, Ted Baker will be hit on a number of fronts because of the lockdown. Firstly, and most obviously, its stores are shut as non-essential. A company that can’t sell its products is not going to last long.
Secondly, people don’t buy new clothes to sit in the house all day. Ted Baker may be able to keep its online store open, but it won’t do it much good if nobody is shopping.
This second problem could last for longer. It is hard to tell the social consequences of this crisis, but it seems unlikely that people will rush out to shop for clothes once the government restrictions are lifted.
A company in a strong financial position might be able to withstand this kind of hardship, for a while at least. But Ted Baker was already in dire straits. It may be able to survive, but there is just far too much risk for me to invest.
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Karl 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.