The UK lifestyle brand is hurt by the pandemic. But with its focused turnaround plan, it won’t go out of fashion anytime soon
London-listed Ted Baker is a global lifestyle brand offering menswear, womenswear and accessories in the fashion retail space. The company’s brand operates globally through three main distribution channels.
First is retail which comprises stores and concessions globally, and localised e-commerce sites in the UK, continental Europe, the US, Canada and Australia. The relatively low number of stores owned and higher number of concession locations allows Ted Baker to maintain a flexible store business model and provide an omni-channel experience.
The second channel is wholesale, where the company sells globally as well as supplies products to stores operated by its territorial licensed and JV partners.
The third channel is through licensing, which includes both territorial and product licences. Ted Baker’s licensed partners manufacture and distribute their products independent of Ted Baker, but the product design and style is carefully reviewed by the company.
Our case for Ted Baker is that the company is a pandemic recovery play that can turn around its losses through its strong management and well thought-out strategies. The company’s businesses, particularly from the previous reporting year of FY2019 ended Jan 26, 2019, was adversely impacted by significant levels of consumer uncertainty across many of its global markets.
Specifically, in the external retail market space where Ted Baker has a presence, in digital disruption and changing customer behaviour, along with intense pressures on retail, have negatively impacted both the company’s revenue and costs, where revenue decreased amid an intense level of discounting for its products, while costs increased due to higher spending on promotional activities. This was to compensate for declining demand and sales, which continues to be exacerbated by weak consumer sentiment and political uncertainty from Brexit. Physical retail was also under pressure as stores and concessions had to be closed due to the pandemic, along with cancelled or delayed orders from partners and customers.
Ted Baker is in an industry that requires flexibility and transformative business strategies in order to face structural challenges in the aftermath of the pandemic. Acknowledging this, Ted Baker, in June, launched its strategic transformation programme, the Ted’s Growth Formula. The programme focuses on improving efficiencies of the business while addressing key drivers of underperformance; is pivoted towards a more customer-centric and digital approach; and is based on three building blocks which we think would enable the company to be more profitable in terms of cash generation and receive a higher return on capital employed.
The first building block is to stabilise the company’s foundations. This includes appointing a new chairman, CEO, CFO and changing the executive team; recapitalising its business that includes restructuring and reduction of debt through the sale of Ted Baker’s head office, which should help improve the company’s financial flexibility over the near to medium term; and responding effectively to the pandemic, including strategies to reduce costs and protect its cash flow.
The second building block is identifying and investing in growth drivers. The focus of the company will be on new e-commerce and digital platforms to operate a digital-first retail strategy, which is important in driving future growth.
The company has also identified primary growth drivers. These include attracting more customers by delivering a deeper and broader relationship with new and existing customers that leads to better brand loyalty; re-energising the brand through innovation; expanding its product portfolio with the goal of making clothing more relevant for day-today wear; and strategising ahead to capitalise on future industry trends.
The third building block is operational excellence, which is centred around lowering business costs, improving efficiency and tightening controls. Some of the strategies under this include changing the way the company buys goods by streamlining and reducing sampling; who it buys from through the consolidation of its customer base; and where it buys from by relocation of its sourcing markets. This should aid product margins. The company’s additional measures of focusing on working capital efficiency, reducing operating expenditure, and focusing on enhancing its digital systems ought to improve the overall profitability of the company over the long run. The first step to solving a problem is by clearly identifying it in detail — which we believe Ted Baker has done right.
In 1HFY2021 ended Aug 8, 2020, Ted Baker’s results were significantly affected by the pandemic because of depressed demand and the closure of stores for a significant proportion of the period. This led to a drop in revenue of 45.9% y-o-y.
However, with the company’s response to the challenging market conditions, it was able to bring down total operating expenditure before non-underlying items by 28.8%.
Management has also updated their guidance as they are confident that the business will recover and is on track to deliver its transformation plan despite headwinds from the pandemic. This includes bringing forward its target of net debt/Ebitda of one time or less from FY2023 to FY2022. Chart 1 shows its default risk probability, which is calculated using metrics such as leverage ratios, interest coverage ratio and quality of assets, and then compared with industry peers. Ted Baker’s default probability has dropped much since the implementation of its transformation strategy, indicating that the company is en route to recovery.
Analysts have given a target price of GBP1.70 ($3.11), which is much higher than its current trading price of GBP1.11, with three “buy” calls, three “hold” calls and no “sell” calls. Our in-house valuation of the company indicates that Ted Baker should be able to achieve turnaround in the next four to eight quarters, and has a potential upside of 50% if it is successful in turning itself around. For investors with high risk tolerance, Ted Baker is a company with a good recovery story. It will likely see growth in the value of its business over the next few periods and its stock should not go out of style anytime soon.
