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Ted Baker: The bright spot among UK retail stocks

Publication Date: 15 Feb 2018 - By Anoush Fazalbhoy By Anoush Fazalbhoy
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Equity Fundamental Equity UK Consumer

The UK retail sector is suffering from a double whammy effect of inflation outpacing wage growth and a strengthening pound. Retail footfall has fallen 1.6% year-on-year in January with high street traffic falling 1.9%. Though the country's retail sales have shown some improvement from a 3.5% dip noted in December, declining growth has led to many clothing retailers reporting disappointing trading updates and announcing store closures. Ted Baker Plc (LON: TED), however, continues to be a bright spot.

Source: https://www.bloombergquint.com/global-economics/2018/01/11/britain-s-retailers-take-cover-from-inflation-brexit-amazon

The company reported a 9% rise in retail sales over the festive period covering 8 weeks ending 6 January, with e-commerce sales jumping 35%. In fact, e-commerce currently makes up approximately 30% of total retail sales and has been rapidly growing as consumers shift online.

Ted Baker has a strong history of innovative brand campaigns. In March 2017, the company launched a 360 degree shoppable experience ‘Keeping Up With the Bakers’ that enabled users to interact with content and purchase the latest spring/summer collection worn by featured characters. The company also created original tailored content for each of its Instagram, YouTube and Facebook marketing channels as well as interactive store windows at select store locations.

Ted Baker has also been piloting an app in select UK stores that will allow customers to order and pay for products that are unavailable in the store. The products will subsequently be delivered to customers' home, work or be available to collect in-store at a later date. The technology will enable the company to minimise excess in-store inventory while providing customers with full access to Ted Baker’s offerings.

In its latest trading update, the company reported a 5.9% rise in average retail square footage as the company opened a new store in Montreal and concession stores in Germany and Spain. Ted Baker has also expanded its reach with additional stores in Malaysia, Mexico and Qatar through licensed partnerships. As the UK market makes up about two-thirds of the company's revenues, international markets represent a key for future growth and boost to company's earnings. 

Ted Baker’s gross margins were in-line with expectations and the company ended its financial year with a ‘clean stock position’ meaning that it will not have to cut prices to shift surplus stock. This is important given the current climate of rampant cost-cutting among retailers to attract customers. While Ted Baker maintained its annual guidance, the company did warn that external trading conditions are expected to remain challenging.  

In addition to the uncertainty surrounding the impact of Brexit, retailers are also facing pressure from e-commerce behemoths like Amazon (NASDAQ:AMZN). While Ted Baker’s e-commerce sales have been strong, Amazon has been making it own strides in fashion.

Source: https://www.bloombergquint.com/global-economics/2018/01/11/britain-s-retailers-take-cover-from-inflation-brexit-amazon

In the past year, Amazon has launched a private label brand Lark & Co. Though the label competes with the likes of Zara and H&M, rather than more premium offerings from Ted Baker, Amazon is a threat to bear in mind. Quite recently, it has placed advertisements in Vogue, struck partnerships for collections with Calvin Klein and even launched an AI powered stylist. 

While Amazon’s apparel sales have been largely basic wear such as socks and T-shirts, it certainly has the resources to woo a high profile designer or scoop up a fashion brand to compete with the more premium brands. The company launched seven fashion brands in the UK in September and hired former chief executive of Victoria’s Secret, Chistine Beauchamp, as president of its fashion business.

Though Ted Baker has shown resilience in the past, the threat of Brexit and tough competition are areas of concern. Its stock price has appreciated by around 10% year-to-date and given the current market jitters, investors should be prepared to weather some volatility in the share price in 2018. Admittedly, the company does not have the explosive growth of Boohoo.com and Asos, but has more reasonable valuations and sustainable longer-term growth. By focusing on more premium fashion and the customer experience, Ted Baker is also better positioned to fend off the threat of Amazon in the near future at least. 

Disclosure:

I have positions in the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Anoush Fazalbhoy

 

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