Should investors pile in to battered FTSE 250 growth stock Ted Baker after today’s news?
Surviving the carnage on the high street is hard enough these days but recent claims of harassment made against founder Ray Kelvin have threatened to make the job more difficult for global lifestyle company Ted Baker(LSE: TED). Brand loyalty is, after all, very easy to lose in the hyper-competitive fashion industry and just allegations of bad behaviour can be sufficient to convince shoppers to go elsewhere.
In the market too, many investors have the theory that it’s better to sell first and ask questions later. While weak consumer confidence has no doubt contributed, the stock fell 22% in just two days in December as an external investigation was announced. From the highs hit in March last year, the company’s value had declined 50% before markets opened this morning.
However, today’s 12% jump in the share price in response to its latest trading update could signal a turn in sentiment.
Expectations met
The numbers were certainly far from bad. Retail sales rose 10.5% once foreign exchange fluctuations were taken into account in the five weeks to 5 January. Internet sales fared even better, growing 17.7% and now account for a little over a quarter of total sales.
In contrast to other retailers, gross margins for the full year were also still in line with expectations, leading management to state that the numbers for 2018/19 should be as predicted.
In other news, the company confirmed that it has completed its acquisition of No Ordinary Shoes at the beginning of 2019 for £20.3m. Once integrated, this purchase is expected to be earnings-enhancing from the next financial year and represents “an exciting opportunity to drive further growth” in its footwear business.
Somewhat understandably, the firm was more tight-lipped on the ongoing investigation, stating only that a further update would be released “in due course“.
Right now, it’s hard to comment on Ted’s outlook with any real certainty. Based on today’s figures, however, I’m cautiously optimistic on it being able to overcome its current difficulties as long as its board continues to act swiftly and decisively.
Trading on almost 13 times forecast earnings before this morning, the shares were clearly more attractively priced than they used to be. A projected total dividend of 63.6p per share translates to a yield of 3.5%. Throw in consistently high operating margins and returns on capital and I think the stock could offer quite a bit of upside for patient investors.
A safer buy?
Of course, there are other options available. FTSE 100 juggernaut Burberry(LSE: BRBY) would be top of my list of alternatives, despite being more expensive to buy than Ted.
Right now, you can pick up the shares for 21 times earnings. That might seem a lot, particularly given that the prices of other stocks have dipped so much over recent months, but for a such a strong brand that still has great growth potential (particularly in Asian markets), I think it can be justified.
Like Ted, Burberry’s management has been able to achieve great returns on the money it invests for many years. I also like the fact that its finances are in excellent shape with the company boasting a net cash position of almost £650m.
With no scandals overshadowing trading, Burberry appears a far less risky buy, even though it will never be immune to a (perhaps Brexit-related) general market sell-off.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry and Ted Baker. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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