A Top Growth Share From The Motley Fool

“Quality and style for the discerning investor”

One of The Motley Fool UK’s top investors is recommending a British brand he thinks has the potential to go global.

Dear Fellow Investor,

We’re all on the lookout for investments that have the potential for major gains in the years ahead. Many such shares flatter to deceive, so it’s important to be highly selective when you’re pursuing a growth investing strategy. However, I’m delighted to say that one of our top investors, Mark Rogers, thinks he may have discovered a true growth gem – it’s a classic British success story that could take the fashion world by storm.

Within this report, Mark also explains how you can get all of The Motley Fool’s very best future stock picks sent direct to your inbox, which could seriously super-charge your returns during 2018 and beyond.

To your investing,

Chris Nials
Executive Publisher
Motley Fool Share Advisor

By Mark Rogers

Price data as of 26 January 2018.

About the company

When it comes to a good suit, it rarely pays to be cheap.

"You get what you pay for" they say. And for the discerning gentleman who wishes to make an impression, it’s the attention to detail that matters. The quality. It is an extension of the person, subtle, assuring, like a firm handshake.

It’s about more than just the brand label or the price tag. These are lesser concerns to the gentleman. For the discerning gent, above all else, "it has to be right". Well fitting, with timeless quality and charming, irreverent style.

The same could be said for the discerning investor. "Price is what you pay. Value is what you get."

British lifestyle brand Ted Baker (LSE: TED) has rarely ever looked "cheap" by conventional value metrics — but the shares have delivered fantastic returns for investors in recent years, courtesy of the company’s rapid expansion.

Those who have become wealthy investing in Ted Baker to date were not those who winced at the "expensive" label attached to the shares at various points during their meteoric rise. Could the same be true today, as Ted Baker sells more of its high-value dresses and suits to affluent consumers around the world?

Investment thesis

Ted Baker’s unwaveringly British brand is a true UK business success story, expanding from a single store in Glasgow to become a luxury lifestyle brand that has delivered a roughly 30-fold total return to investors since July 1997. That’s no coincidence — sales have grown every single year from £14m to £531m since then and, astonishingly, Ted Baker has achieved this without ever having a formal advertising campaign.

The man behind Ted Baker’s meteoric rise is fashion entrepreneur Ray Kelvin, who still runs the company today. The son of a dressmaker in North London, his personality is woven into Ted Baker’s business and product lines — unlike a stereotypical flamboyant fashion boss, Kelvin is down to earth, shuns media attention and is rarely photographed in public.

Kelvin has played a critical role in the development of the brand, and Ted Baker’s unique culture and personality — and he’s an important part of our thesis here. At The Motley Fool, we love to see businesses that are still run by their founders, with substantial "skin in the game". Ray Kelvin owns 35% of Ted Baker, and I’m excited to see how far this visionary leader can take the company.

This great British success story is increasingly becoming a global one. From almost nothing a decade ago, Ted Baker now generates more than £200m of sales overseas. And in my opinion, Ted Baker is only just beginning to fully leverage its brand globally.

Compared to the likes of Burberry, Ted Baker is barely scratching the surface of its international potential. As recently as 2002, Burberry sold just £124m of its high-margin luxury wares abroad. Today, it sells more than £2 billion outside of the UK. Could Ted Baker do something similar in the next ten years?

I think Ted Baker has the brand, the culture and the management team to potentially become the next British fashion brand to be a major global success — especially as disposable incomes rise among emerging market consumers.

Financials and valuation

At the time of writing Ted Baker’s shares trade at around 26 times last year’s earnings. Ted Baker has confounded value investors for years by consistently exceeding the growth priced into the shares — is the same true today?

Looking at this opportunity through a "growth investor" lens, like we might in our Fire recommendations at Share Advisor, it’s important to consider the market opportunity, the quality of the brand and management team, and the growth potential on offer.

Ted Baker has a tremendous track record of growth, routinely achieves double-digit operating margins and has delivered an average return-on-capital (a useful quality measure) of 18.4% over the past three years. It is currently a £1.3bn company with £531m of sales globally — but I think Ted Baker could achieve more than £1bn in sales in the next decade, if it continues to successfully expand, and take advantage of its market opportunity.

In this event, it’s possible that Ted Baker could become a much more valuable business between now and 2025, perhaps even up to £4bn at the top-end if everything were to align perfectly (three times more valuable than it is today).

Risks & when I’d sell

I’m a big fan of Ted Baker’s charming, unmistakeably British brand and I’m bullish on the company’s long-term prospects with Ray Kelvin in charge.

There’s some degree of key-man risk here, though, if the unconventional Kelvin either departed from the business, or somehow "lost his touch" in the fast-moving world of fashion. Personally, I believe Kelvin (who is in his early 60s) still has a large runway in front of him, and remains as sharp today as ever. I might begin to look toward the exit, however, if Kelvin stepped away from operations.

Lastly, Ted Baker’s international growth will depend on global demand from consumers overseas. This means a greater exchange rate risk, and an expectation for consumers in emerging economies to (eventually) prosper. If we saw signs that Ted Baker was failing to gain traction in these economies, we might reconsider our position.

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As of 26 January 2018, Mark owned shares in Burberry but no other company mentioned in this report. Chris owns no shares mentioned in this report. The Motley Fool UK has recommended shares in Ted Baker & Burberry.

Risk Warning

• The value of shares and the income from them can fall as well as rise.
• You run an extra risk of losing money when you buy shares in certain smaller companies including "penny shares".
• There is a big difference between the buying price and the selling price of these shares. If you have to sell them immediately, you may get back much less than you paid for them. The price may change quickly, it may go down as well as up and you may not get back the full amount invested. It may be difficult to sell or realize the investment.
• You should not speculate using money you cannot afford to lose.
• We have taken all reasonable care to ensure that all statements of fact and opinion contained in this publication are fair and accurate in all material aspects.
• Investors should seek appropriate professional advice from their stockbroker or other adviser if any points are unclear.
• This newsletter gives general advice only, and the investments mentioned may not necessarily be suitable for any individual.
• The newsletter may recommend securities listed on overseas stock exchanges. Investors may incur extra charges when dealing in these securities and should check with their stockbroker before dealing.
• Changes in exchange rates may have an adverse effect on the value of the value or price of these investments in sterling terms.

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