Quirky British fashion label Ted Baker (TED) ticked 1p higher to 904.5p after signing a new product licence agreement with Next (NXT) to accelerate the expansion of its childrenswear collections.

Partnering with Next, which nudged up 20p to £56.60 on the news, brings Ted Baker access to the high street clothing colossus’ supply network spanning over 40 countries and should bring greater opportunities for Ted Baker over time.

However, management doesn’t expect a ‘material financial impact’ from this deal in the current financial year or next, possibly explaining the rather muted share price reaction to such an exciting deal.

The new licence replaces the current childrenswear product deal with Debenhams, the fallen department store that established the Ted Baker childrenswear business, although Debenhams remains a licence partner for Ted Baker-branded lingerie and nightwear.

READ MORE ABOUT TED BAKER HERE

Today’s tie-up in an important product category is a welcome piece of positive news for Ted Baker, whose shares have been battered by a flurry of downgrades in recent months. Founder and former chief executive officer (CEO) Ray Kelvin is even rumoured to be mulling a private equity-backed bid to take the out-of-favour fashion retailer private.

TERMS OF THE TIE-UP

Under the terms of the tie-up, which will run for an initial five year period, Next will create and sell Ted Baker childrenswear products spanning baby, boys’ and girls’ clothing, as well as shoes and accessories in collaboration with Ted Baker’s creative team. The new collections will launch in Spring 2020 and will be sold through Next’s retail channels and wholesale relationships as well as through Ted Baker’s websites.

Ted Baker CEO Lindsay Page said: ‘Product licensing is a proven and highly successful pillar of Ted Baker’s strategy to expand as a global lifestyle brand. It enables us to carefully develop the brand in new, relevant categories by leveraging the specialist product expertise of our carefully selected partners.’

Page added: ‘Our childrenswear collections - which are small in size but big in style - have already proven incredibly popular with Ted Baker customers. As a multi-channel retailer with global capabilities and wholesale experience, Next is the outstanding partner to take Ted Baker forward in this category, which we believe will deliver significant growth in the coming years.’

IS TED TOO CHEAP?

Bullish on Ted Baker with a £12.80 price target, Liberum Capital says the news ‘should be seen as a positive for Ted Baker in its important high margin licensing division, which overall contributes over 30% of group EBIT. Within this, childenswear is strong, ranking as a top-five product category.’

Furthermore, the broker believes the new agreement ‘significantly de-risks Ted Baker’s childrenswear business. Its current partner Debenhams, has clearly been struggling for some time and its financial health has deteriorated. Switching to Next brings in an ambitious new partner, with a strong balance sheet and the capacity to properly invest behind the product.’

Turning to Ted Baker’s lowly valuation, Liberum appreciates the disappointment of some recent news flow and earnings downgrades, but argues that ‘irrespective of these the shares are far too cheap, in our view.’

‘If the current valuation persists then the group looks vulnerable to an approach which could come from a number of different sources. The brand remains strong and the business is very well-invested, so this opens up an approach from trade to private equity.’

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Issue Date: 16 Aug 2019