I ask a question which a year ago would have been something you would not have thought of asking: could Ted Baker (TED) go bust? Its shares, £17 a year ago, now trade at 470p valuing the business at just £212 million...
The deadwood press may focus on the impact of the departure of founder and CEO Ray Kelvin amid groping allegations. The guy was talented and his loss cannot have assisted, but the real issue is the macro headwinds which were reflected in dismal results for the six months to August 10. Sales were down by 0.7% but operational gearing and clear margin erosion saw profits before tax at an underlying level fall by 110% to minus £2.7 million. The interim dividend was thus slashed by 56.4%. Heaven knows why, with net debt at £141 million – and available facilities of just £180 million – the company did not axe the payout altogether.
So what is to blame? The company states: 'we are continuing to pro-actively manage the significant challenges impacting our sector including weak consumer spending, macro-economic uncertainty, and the accelerating channel shift towards e-commerce. However, we are not immune to these pressures which have impacted our financial performance during the first half of the year'. So folks are buying more online right? Well not at Ted Baker. Its e-commerce sales fell by 1.3%.
The bottom line is that over-borrowed and under-saved consumers are spending less and Ted’s more-expensive-than-norm offering is clearly vulnerable to this. So we are told that trading so far in the second half has been poor and if that continues this year’s H2 will be worse than last year’s. Natch, Ted blames the weather and Brexit but it strikes me that what we are seeing is a global economic slowdown and so it does not matter what happens on Brexit or if the world gets hotter or cooler over the coming months, the real macro headwinds are unavoidable.
So that brings us back to borrowings which, at an underlying level, came down by £11 million in the first half but I rather tire of companies that wheel out exceptional after exceptional. The fact is that borrowings are too high and those borrowings are subject to covenant tests which, if things continue as they are, may well be failed at some stage. My guess is that, although the City really has no real appetite to back retail rescue rights issues and placings, it will see this as a brand worth backing. The banks will, I suspect, force the dividend to be axed entirely in due course, when a covenant test is tripped so do not buy this for yield. There has to be a major risk that at some stage the banks will force Ted to raise fresh equity to get its debt back under control. So on that basis I cannot see Ted being a zero but it might be. But equally it is certainly not a stock to bottom fish and on the basis that another profit warning before Christmas is very likely and a desperate placing is more than likely it has to be, on balance, more of a short than a long.
This article first appeared on the N50 website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of a new shorting piece from Tom or Lucian & a NEW SHARE TIP ON FRIDAY from Tom & Steve click HERE
Filed under: Ted Baker, Bearcast, Bidstack, ShareProphets, Woodford, BenevolentAI, Time Out
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