Ted Baker – Share price has further to fall #TED
I don’t usually short stocks, but had a gut feel that Ted was a short candidate last November. A store I walked past was empty with a big sign, 50% off – not what I like to see from an aspirational affordable luxury brand.
Promise: This is not hindsight capital!
At the same time, they were asking people in the mall to take a picture and in exchange get a 15% off voucher (full price). It didn’t matter if I had a social media profile and I did not even have to provide my email.
29th January Announcement
Unsurprisingly, their online sales are not growing and last week they announced the hire of a “Chief Customer Officer” to work on their online strategy. First thing I would suggest is to ask for the person’s email if you are offering a discount card. That way, at least you can keep spamming them!
This appears to be the fall out from the consulting review that they carried out after a number of executives left the business.
22nd January Announcement
They announced an overstatement of inventory of approximately £20m – 25m in December, which a month later upon investigation was found to be £58m. The review is largely complete and that is the expected outcome (Inventory Update 22nd January).
The directors were gracious enough to remind shareholders that this is a non cash item and relates to prior year.
No trading update
In early January last year, they provided a trading update telling us that things were going pretty well. This time, they said they would update at the preliminary results, and did not say when these would be announced.
I am not expecting much from these results, given:
- their announcements to date,
- my anecdotal evidence from casually observing the store,
- in a brutal environment, management have been distracted by accounting fraud or incompetence,
- they appointed restructuring consultants to review strategy,
- many competitors have reported horrible results.
Indeed given all these announcements, I am surprised by how resilient the share price has been. Ray Kelvin (the founder and former CEO) owns 34% (having recently upped his holding) and I believe Toscafund bought a meaningful stake when the inventory troubles were first announced.
Why is this a short candidate?
In a sentence, I think there is a reasonable chance that this business will find itself in financial distress.
The current year guidance is for a minimum PBT of £5m and maximum of £10m (a wide range with less than two months remaining) and I expect if it was at the upper end or a beat, we would have heard about it already.
Net Debt last reported was £141m (a whopping 14x PBT) and their facility is for a total of £180m, excluding lease commitments, so they are getting a little low on headroom.
There are mixed views on whether leases should be included in debt, but let;s assume these result in an outflow of cash of at least £40m.
The fact that they appointed a restructuring consultancy as opposed to a strategy consultancy to advise on strategy suggests that there are problems with the debt.
I am interested in their attempts to spin gross margin (with a far lower opening stock in the current and previous year) when they adjust the results. The results will likely be riddled with adjustments for one-off costs from investigation, restructuring and also I imagine audit fees are going to be a lot higher this year!
“But it’s already too cheap”
Based on their December guidance, we are looking at a valuation of anything from 15 – 30x earnings. On an adjusted basis it is very cheap (on a PE basis) but less so on EV/Op Profit, given most recently reported net debt is greater than the market cap.
On a historic basis, the company is trading at 2x 2019 adjusted earnings and 4x TTM adjusted earnings. My prior investing experience supports the view that multiples like this don’t usually end well.
While there is no imminent bankruptcy risk (facility is for three years), I do see this as a candidate for severe financial distress. The Altman Z score per Stockopedia has gone from 5.24 in September last year to less than 1.8 today and has been on a downward trend.
The Z-score factors where it does well, won’t last much longer. They are going to take a big hit on working capital (inventory) and this impairment will go through retained earnings.
Given that these are historic adjustments, the historic Z-score is likely materially overstated.
My two doubts are the large shareholders (Ray Kelvin at 34% and Tosca Fund at 12%) and the extent to which the news is already priced in. On the former, it would appear the market agrees with me and on the latter, I was reassured by Tony’s article here.
Looking forward to reviewing the results, whenever they come!