... "This is my new favorite bag. An 8% discount rate for lease liabilities seems very dubious, especially as it’s much higher than the company’s typical borrowing rate. That is simply too low: Only invest in a company if its ten-year average net return on lease adjusted capital (net ROLACE) is above 10%. On the surface this collapse was surprising because, until recently, Ted Baker had what appeared to be an exceptionally impressive track record of success. For example C&A the clothing retailer quit the UK in the late 90s, in hindsight it seems like it was a wise decision. I am also from London and Ted Baker here is quite popular and in my opinion is quite expensive for what it is. Ted and many other companies show how tough capitalism is, and when things go wrong they can go very wrong very quickly. Delivery & Returns. When I exclude leases I get ROIC 17% and 15%. That worked for a long time, but eventually Ted found itself in a market characterised by heavy discounting, and this left it unable to afford its excessive lease and debt liabilities. The result is a serious car crash, but one which was the fault of the people behind the wheel rather than the car itself. You get PE by dividing the share price by the earnings per share (EPS). Management chose to increase its growth rate by using large amounts of lease capital and, more recently, debt capital. I guess by this you mean putting cyclical companies into a portfolio where steady and growing dividend income is one of the main goals, when it seems obvious that such a portfolio should focus primarily on defensive dividend payers like utilities, food manufacturers, medical suppliers and arms manufacturers. Instead, Ted’s debts that year went up by almost 400% (from £26m to £98m) while its lease liabilities went up by about 50% (from £171m to £258m). I agree, although I am somewhat overweight the sector due to the ‘attractive’ valuations (we’ll see if they were attractive after I sell my retail holdings!). But that’s just my approach and investing in turnarounds is an entirely reasonable strategy if that’s your thing. If you'd like to try my defensive value investing strategy for free. In fact, once their very large rental obligations (also known as operating lease liabilities) were correctly added to capital employed, their returns on capital employed declined from very high levels of around 20% to unacceptably weak levels of less than 10%. Hopefully I have at least clarified my position on each point but let me know if not. My gut (for what it’s worth) tells me that Ted has the potential to be a truly above average business, more like Burberry, if the company hires a hard nosed CEO who knows how to run an international premium fashion retailer efficiently and effectively, using little or no debt and realistic growth targets. We can begin to answer that question by looking back to 2009, when Ted had £62 million of equity capital, no debt capital and £100 million of leased capital (lease liabilities giving it the right to use retail stores, warehouses, and other leased assets). You also have the option to opt-out of these cookies. 8% isn’t a horrendously low return on capital employed, but it’s a lot less than 22% and it breaks my rule of thumb for returns on capital employed. In Ted Baker’s case, I think its long track record of near-20% growth year after year left it with a range of problems, from somewhat excessive debts to weak inventory management and lots of new customers who had little loyalty to the brand. That company was The Restaurant Group and its history was eerily similar to Ted’s. From this point of view it seems that Ted’s impressive growth could be similar to The Restaurant Group’s impressive growth (before both imploded). This new change to track external growth funding has reduced its Growth Quality score from 92% to 68%, so quite a big drop. We also use third-party cookies that help us analyze and understand how you use this website. Ted had returns on capital employed of 8%, paid about half of that out as a dividend, and yet managed to grow its capital employed (and revenues, earnings and dividends) by about 18%, year after year. Ted Baker looks a little expensive for my taste, trading on 28 times 2015/16 forecast earnings, with a prospective yield of just 1.7%. artificial bottlenecks they retain significant pricing power. Of course, 'affordable' is a relative concept in fashion. In April 2019 the company’s founder left amid a “hugging” scandal and Ted’s long-time CFO took over as CEO. Pension liabilities?. If you don’t put any additional funds into that account then the most it can possibly grow by, even if you reinvest all interest back into the account, is 10%. Entering into hypothetical territory, what I was alluding to was a forced takeover via a TOSCA – Ray partnership (together they now own c.51% of shares). There’s a lot to unpack from your comment, so I’ll take them one by one: “why you select such clear poor fits for a dividend portfolio”. The company was founded by Ray Kelvin who entered the clothing industry as a schoolboy, working in his uncle’s menswear shop. Some of the 900 students who arrived for the new term on January 5 with new bags from designers including Ted Baker, which can cost up to £289, were told to bring a … Ted’s net ROLACE (net return on lease-adjusted capital employed) has averaged about 8% over the last decade, which is very similar to (and possibly slightly below) the market average rate of return, implying that Ted is a very average company with no significant competitive advantages. I can understand why you might think that, but neither statement is true. The answer is that lease liabilities should be on the balance sheet as a form of debt and a source of capital, and thanks to IFRS 16 (PDF) this is now an accounting standard. This category only includes cookies that ensures basic functionalities and security features of the website. You’re right of course. The founding premise of Ted Baker was that it would be a quirky, fun, brand-focused clothing business. A Ted Baker bag is better than a compromise and the sleek, luxurious arm candy available will have you marvelling at reasonable price tags. a $10 shipping fee will be applied to orders under $200. [Ted Baker ITE1094]My latest edition, It's definitely not my expensive watch, but DAMN it's classy! No significant up-front cash outlay as the property is funded by (and effectively owned by) your bank or landlord and. Your email address will not be published. There was no way I could have afforded the $10,000 cost of attending, air flight, hotel etc. Higher debt and lease liabilities are of course a risk, but very rapid growth is also a risk. In fact, once their very large rental obligations (also known as operating lease liabilities) were correctly added to capital employed, their returns on capital employed declined from very high levels of around 20% to unacceptably weak levels of less than 10%.”, I’m not really sure I follow your calculation here in assessing TED’s returns. My model portfolio holds a range of other general retailers which have yet to suffer significant problems, despite operating in the same weak market as Ted Baker. There will always be rubbish mixed in with the gold, and that’s why it’s a good idea to manually analyse companies even if you use a stock screen. We take a look back over Ted’s history to see just how out of the ordinary the brand may be… 43. Pls WORK TO REDUCE COST OF SHIPMENT. Necessary cookies are absolutely essential for the website to function properly. A masterclass in how leases and FRS16 are being used as applied to CINEworld. Why Ted Baker has been a disaster and a gift in equal measure, How to find quality companies producing consistent and sustainable growth, How to measure dividend growth and the factors that support it, The importance of consistently covered dividends, Tips for investing in a coronavirus world, The S&P 500’s CAPE ratio says the US is still expensive, A dividend investor’s guide to recessions, depressions and pandemics, The potential impact of coronavirus on dividends. Required fields are marked *. Here’s a quick review of the major events: As a quick aside, I should point out that I’ll be largely ignoring the “hugging scandal” surrounding the resignation of founder and CEO Ray Kelvin in early 2019, as I don’t think it’s responsible for much, if any, of Ted Baker’s current problems. I agree. Generate consistently high returns on lease-adjusted capital employed over long-periods of time. It should look to how Laura Ashley and Liberty - also famed for florals - mix it up with variations on signature prints. Fortunately it’s an easy mistake to fix and lease liabilities have been integrated into my investment spreadsheet and checklist since late 2019. What we need to do is compare the amount external funding with some measure of the company’s ability to absorb that funding. ! Rapid international expansion, and further growth at home, drove half-year retail sales up 30 per cent at Ted Baker (TED) - and the share price is only a short swagger down the catwalk from an all-time high. That is your capital. I think through most of Ted’s history it used leases that were either too expensive or too long, but at least it didn’t make the mistake of having lots of debt as well. If Ted was below average, or even just mediocre, that would be very difficult. Maximum quantity reached. The Ted brand pride themselves on being ‘no ordinary designer label’ – suggesting they’re a little quirkier, a little bolder, and a little more exuberant than their rivals. a contractual obligation to pay out an agreed amount every month (or quarter, or year) to either your bank or landlord. Yes, Ted Baker’s debts had increased rapidly each year, but why? Even if I’m very generous and compare liabilities to those peak earnings, the ratio of liabilities to earnings is 25x. We also use third-party cookies that help us analyze and understand how you use this website. It’s one that I have come across recently myself as a value investor, based purely on it’s fundamentals, although I have not dived in as much as you have here (which has been a very informative read – so thank you for that), it does look rather cheap now that it has overcome this execptionally rocky period. Mid Season Sale - Up to 40% off*. You can also download a PDF version of this post-sale review. So I’m pretty sure that at 800p it wouldn’t be anywhere near the top of my stock screen. The difference with these two companies is that they satisfy your new criteria of self funded expansion, either by organic growth programs or bolt on acquisitions, all of which are complementary. Like most investors, I just calculated capital employed from the balance sheet using equity capital and debt capital, but not leased capital. The first was my switch from ROCE to ROLACE (return on lease-adjusted capital employed), in other words taking account of the return on leased capital such as retail stores. Equity can be raised through rights issues, but the easiest way to raise additional equity capital is to retain some of the earnings generated by the company each year. By continuing to use the site you are agreeing to our use of cookies. With 51% ownership they already effectively have control and in theory can put who they like in as CEO or change the board or push through a public to private sale, forcing other investors to sell. Next is in a recovery mode, but it could very well hit the rocks in the future and in that respect is probably still a higher risk, as is Burberry, where someone once said to me “think Burberry, think Austin Reed” — It could well happen although Burberry has a better financial structure than the former — but for how long? “obsession with dividend can be counterproductive.”. This blunder is the last thing it needs. I agree. Soon, Ted Baker stores were popping up all over the world, with global fashionistas coveting the British-born label. When you’re calculating ROCE or ROIC the standard approach is to have return and capital numbers match up, so return should be EBITR (EBIT before rent) for lease adjusted ROCE. Furthermore I invested another £120 in the recent cash raising doubling my number of shares in the belief that a small recovery could get some money back. The alternative is externally-funded growth, which involves taking on more debt and lease liabilities or raising equity through rights issues. Or alternatively, at 800p its rank would have been much worse than 2. If they did have meaningful competitive strengths then in almost all cases they would use them to generate more profit. Investing in Ted Baker was a mistake caused by a lack of understanding of the importance of lease liabilities. Bicester and Freeport at Braintree (Essex) have Ted Baker stores where the stuff is a lot cheaper. Even Steve Jobs when he returned back to Apple he shrank the company and managed it in a financially prudent manner. Yes, they use external funding in the form of debt capital and leased capital, but growth funded by those sources has been dwarfed by growth funded by retained earnings. Personally I like dividends, I like the steady drip of cash into my accounts and I intend to retire on dividend income alone at some point in the distant future, so that’s why I run a dividend-focused portfolio. All retail companies in the UK suffered. This is the magic of using other people’s money. As I looked at these two companies it dawned on me that they were both property-heavy businesses, dependent on rented stores or restaurants. That’s exactly what I did, and my findings are detailed in this article. The first point I want to make then, is that improvements to my Company Review Spreadsheet in recent months have identified several red flags in Ted’s otherwise impressive track record. And if that same company pays out half its earnings as a dividend then its retained earnings will be equal to just 2.5% of its capital base, and therefore that will be its sustainable self-funded growth ceiling. The market’s reaction seemed excessive (to me at least), with Ted Baker’s share price falling 40% or so following the announcement. Your email address will not be published. This rapid increase in debt and leases helped Ted’s capital base grow more than 50% that year, far faster than its sustainable self-fundable growth rate of 4%. However, that wasn’t the case when I bought Ted Baker, and not taking account of lease liabilities was the single biggest mistake I made with this investment. As for Ted moving from 25th to 70th, it didn’t. That turnaround plan has now been announced, and it focuses on capital-light growth with Ted becoming an online-first rather than store-first retailer, with efficiency and cost reduction used to drive higher returns on less capital in the future. Ted Baker London. This site uses cookies. In the first two cases you would probably get a loan and pay it off over a number of years. Ted Baker, for example, never made up more than 5% of my portfolio, so even if it went bust I wouldn’t have been overly concerned.
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