At an early stage of the financial year, the global lifestyle brand’s retail and wholesale margins are coming under pressure amid heightened promotions and consumer uncertainty in key markets, forcing it to materially downgrade earnings expectations and stoking speculation troubled ‘Ted’ could become a takeover target.
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Ted Baker issues its second profit warning since February, with the retailer now expecting to generate underlying pre-tax profit in the range of £50m to £60m for the year ending 25 January 2020.
This reflects consumer uncertainty and ‘elevated levels of promotional activity across our global markets’, which will continue to hit trade throughout the remainder of the year.
The warning triggers savage downgrades for the shirts, suits and fragrances designer, with Liberum Capital slashing its adjusted pre-tax profit forecast by the best part of 30%, from £70.7m to £50.3m.
The latest profit warning represents another blow for Ted Baker, whose founder and chief executive officer (CEO) Ray Kelvin recently resigned following a probe into ‘hugging’ claims made by some employees.
RETAIL SALES IN REVERSE
For the 19 weeks to 8 June 2019, Ted Baker achieved a modest 3.8% increase in group sales as total retail sales (including e-commerce) softened 0.3% and wholesale revenues rose 14.2%.
It blames the growth slowdown on difficult and unpredictable trading conditions, unseasonable weather across North America in the early part of the period as well as the aforementioned heightened promotional activity across global retail markets.
Liberum Capital adds: ‘What has also become apparent today is that the company has had product issues which all relate to womenswear. These are temporary and fixable with merchandising adjustments already made to ensure the collection is better balanced for the upcoming season.
'In speaking to management, performance in menswear has been in line with expectations and flat with last year suggesting there is nothing in this update that reflects poorly on the brand and the issues are very much on the current womenswear collection.’
PAGE REMAINS POSITIVE
New CEO Lindsay Page, Ted Baker’s erstwhile finance director who stepped into the breach following Kelvin’s departure, insists: ‘Ted Baker remains an outstanding brand and, underpinned by the strength of our flexible business model, including a relatively low number of own stores that showcase the brand, we remain confident in our long-term growth prospects.
‘Several of our new product initiatives will commence imminently and we are confident in our collections for the coming season. We are relentlessly focused on achieving cost efficiencies as well as further cost savings throughout the business.’
THE EXPERTS’ VIEW
Liberum believes ‘the short-term and identifiable issues around product are being addressed swiftly but the unpredictable trading backdrop across all markets appears to have less end in sight.’
Intriguingly, the broker also suggests Ted Baker is vulnerable to a predator following recent earnings disappointments and a drooping market valuation: ‘Acknowledging the likely share price reaction and shareholder disappointment, it is likely that speculation will rise considering the market capitalisation being so low.’
Russ Mould, investment director at AJ Bell, comments: ‘A profit warning from Ted Baker will not help with its efforts to win back the market’s favour following the Ray Kelvin hugging row.
‘Kelvin resigned as chief executive earlier this year and an investigation was made into the company’s policies, procedures and handling of complaints.
‘Companies in Ted’s situation normally need a few sets of financial results to convince investors that previous problems have been addressed, thus it can often take a year or so to regain market trust.
‘Today’s profit warning essentially resets the clock back to zero.
‘Margins have been hit by high levels of promotional activity and sales overall have struggled amid very bad weather in North America and generally tough trading conditions in retail.
‘Blaming the weather is normally a questionable excuse but there is clear evidence that the US has been drenched by severe rain this year which has put people off shopping. And many other retailers have already flagged difficult times in the region this year.
‘What’s less forgivable is the so-called “challenges” with its Spring/Summer collections, understood to be product issues with its womenswear range.
‘Ted has now issued two profit warnings since February and these setbacks normally come in threes. The previous warning was primarily caused by writing off the value of unsold clothes.
‘Once seen as a shining star in the retail sector, Ted Baker is unravelling fast and needs to do something quick to stitch itself back together.’