Stockwatch: can a new boss help refashion Ted Baker?

Conservative investors steer clear, but transformation plans make the current share price look attractive.

Have re-ratings since November been so wholly driven by changes in the risk premium for equities? Following serial good news on Covid-19 vaccines most charts show the same spike, in the order of 30% and above. 

After ‘quality’ rose initially, there was then the classic ‘dash for trash’ as traders alighted on anything perceived as having been left behind, regardless of fundamentals.  

Look below and beyond ‘rear-view mirror’ figures

Car manufacturer Aston Martin Lagonda (LSE:AML) is up 58% to 82p, despite horrendous dilution in a capital raise, and before yesterday’s interim results clothing maker Ted Baker (LSE:TED) had soared 67% to 142p. 

The figures gave Ted Baker quite a reality check though: a £39 million underlying pre-tax loss, chiefly due to revenue down 46% to £170 million, impacted by Covid-19 restrictions globally. 

About 72% of revenue is UK-derived, the rest comes mostly from the US. Not surprisingly, during Covid-19 the interim dividend was passed. The stock dropped 15% to 117p, but really, did traders expect better in terms of the ‘rear-view mirror’ figures? 

More positively, Ted Baker’s current trading is described as “resilient with a particularly strong performance online”. This was helped by more vigorous promotion, and there is good progress against key performance indicators in year one of a three-year transformation programme. 

• The Week Ahead: Rolls-Royce, Ocado, Ted Baker
• Shareholders brace for flurry of City fundraising

The latest boss – who joined initially as chief financial officer in November 2019, then was appointed acting chief executive that December – says the balance sheet is “materially stronger than envisaged”. 

Despite the stock appearing on yesterday’s biggest fallers list, down around 15%, I would not lose sight of a potential steady turnaround underway. 

Downside should be limited by net assets around 91p a share and there looks to be a capable new chief executive. Although £95 million capital-raising last June at 75p meant share dilution, it has eliminated bank debt and provided means to invest in a transformation plan.

Best take your own view than rely on forecasts

Possibly led astray by company guidance, analysts have appeared to err charitably. A year ago, with Ted Baker at 410p, consensus forecasts implied a forward price-to-earnings (PE) ratio of around 6x and a 7%+ yield covered 2.2x by earnings.

But when I examined it here, Ted Baker appeared to be a plain ‘avoid’, despite its alluring chart showing a plunge from 3,500p at the end of 2015, and apparent capitulation to 370p. 

Distribution and administrative costs rose, and I was stunned by £210 million of inventories – 115% of market capitalisation – as if this underlined Ted Baker’s marketing dilemmas, besides needing a lesson in stock control. 

The story involved Ted’s founder chief executive resigning in March 2019 over a “forced hugging” internal row, yet the financial table shows underlying downturn from the financial year ending January 2018.  

The chart context shows an 85p low last March, albeit three rallies since of more than 140p, as if a fan club is gagging to revive it.

A current level of 117p can therefore still be seen as broadly a low, and compares with August net assets per share of 91p. 

Boss’s calibre increases the chance of a successful turnaround

At first sight, the notion of an accountant in charge of a business that ultimately needs to prove marketing mettle as a fashion brand seems awry. 

Rachel Johnson had also previously been chief financial officer at Debenhams. She previously held positions in finance and strategy at Domino’s Pizza, Vodafone and John Lewis, and from her overall CV appears quite an operator.  

My sense is that her overall skills are well-suited to what Ted needs now, and on a two- to three-year horizon she might then move on to a fresh challenge.

To be picky, her decision to join Ted Baker cannot be seen as a reliable judgment of its long-term prospects, given she previously joined Debenhams! But her actions to date are commendable.

Up to her appointment at chief executive at the end of March she was credited with leading significant change, and as you might expect from a financial background there has been rigorous attention to costs.

As part of an operational and efficiency drive, there have been annualised payroll savings of £31 million, as well as £7 million rent savings in the current financial year, plus ongoing rent renegotiations. 

Last March, and one of her projects as chief financial officer, a £79 million sale-and-leaseback of the head office was struck at a premium to book value.

There has also been a major upgrade to customer payment options and new banking facilities established. Yes, it is all typical of a finance-oriented ‘new broom’, if well-justified. But the upshot is interim free cash flow of £19 million, helping boost cash reserves by 15% to £60.8 million. 

Valid marketing improvements are also being made

There is more to say about underlying financial improvement, but is important to note good initiatives on the commercial/marketing front.

A first priority is to refresh and energise the Ted Baker brand and product range: a ‘Made in Britain’ collection sits at the top, setting the creative tone. 

A new global creative director joined in November and there is a new business development director. 

In all honesty I find it hard to judge how successful this could prove, although it seems the corporate hugging controversy is well in the past.

Its customers seem more likely to be driven by quality of the clothing and accessories than the past behaviour of a previous executive.

The timing of all this could tap into people’s willingness to treat themselves and loved ones, as Britain and America get over the peak of Covid-19. 

A remarkable statistic from the Bank of England is that there is now an extra £100 billion of consumer savings in this country during the Coronavirus outbreak.

That is because people have spent so much time at home, with their finances maybe topped up by furlough and low mortgage rates versus lower outgoings.

• Britons saved £100 billion in Covid-19 – here’s what to do with it
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

We have already seen luxury coverings/furnishings group Walker Greenbank (LSE:WGB) improve its sales amid a boom in home improvements. Possibly people will want to smarten their image once vaccines help them return to society?

Online sales are already doing well – up nearly 42% to £74 million, representing 60% of retail sales and 44% of group revenue. This augurs well for promoting new products, especially if consumer spending on luxury/designer items rises. 

The chief executive says they are on track or ahead of key performance indicators set only last June. This is to be expected, given shrewd managers set them conservatively. There is a caution how it is “still very early days in Ted’s transformation” but “we now have the right foundations in place”. 

Pesky inventories slashed by 32% to £89.8 million

Back to the financial improvements. It was good to see this during the 25 January to 8 August period. Additionally, trade receivables implicitly chased up a 20% fall to £54 million, while trade payables eased 4% to £92.2 million.

These would also be drivers behind the rise in period-end cash but also (together with placing proceeds) eliminating a £180 million bank overdraft, which leaves £160.3 million lease liabilities as the ongoing ‘debt’. Net assets have still improved by 19%, which is material over six months. 

Mind how leases still generated £4.1 million interest due during the period, with the rump of £1.9 million bank debt interest offset by foreign exchange gains.

Also, how there is a caution that “the shape of the estate will remain a lag by the January 2022 financial year” and you wonder if exceptional costs will be involved – and drag on – with sorting this. 

If you want to be cynical, the new boss has a plenty-fine narrative – like they often do – yet there is everything to prove by way of numbers. This will keep conservative investors out of the stock, also given past unreliability of forecasts, although this chief executive appears shrewd as to guidance, hence will probably avoid allowing an over-optimistic consensus (like just before her arrival). 

But given Ted Baker’s asset base and vigorous transformation plan underway, speculators may find the current share price region attractive. The stock has eased further to 112p this morning and in the short term, buyers are probably looking for a new support level. On a two-year view however I suggest: ‘buy’. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.