Financial Analysis of Ted Baker

REPORT ToMr. D. G. Farmer Froman analyst working for Devon Fund Managers (DFM) Date15 / 03 / 2013 Devon Fund Managers A regular report that analyses industry and performance of Ted Baker plc. based on the Ted Baker Annual Report 2011-12. Executive Summary This report is going to analyse and evaluate the Ted Baker plc. by providing the most important ratios of the company and interpretations to them. Furthermore, it is going to recommend to hold shares of this company to existing shareholders and also recommend potential investors to purchase the shares of Ted Baker plc. ince the return of the company is expected to be high in the nearest future. 1. Introduction This report is going to analyse the apparel-textile industry and company performance of Ted Baker plc. by using financial analysis. It will also provide useful recommendations for users about investing in the company. 1. 1 Industrial characteristics Ted Baker plc. operates in apparel-textile industry. This kind of industry is famous for designing and selling accessorizes and clothing[1]. Apparel industry consists of wholesalers and retailers.

Since retail stores can sell their own merchandise in retail, they are more profitable but also highly risky[2]. Moreover, sales revenue in this industry, especially in retails, tends to be highly seasonal. Sales are usually being maximised during holidays and at the beginning of school periods[2]. 1. 2 Industry averages and competitors Textile-apparel industry has an average market capitalisation of 12B, which shows the average total estimated number of issued shares in companies of this industry[3]. Net profit margin of 6. % is a measure of profitability as well as, shows pricing strategy and how the companies within Apparel store manage their costs. Additionally, dividend yield in this industry is only 1. 1%, which illustrates the rate of return on investment. P/E ratio in this industry is 22. 0[3] (refer to Appendices 2). In apparel-clothing sector,Burberry Group plc. ranks first for market capitalization. [3], but it might not be a main competitor of Ted Baker, because of a different style and a price. The main competitors of Ted Baker are Paul Smith, Levi’s, Gap, Reiss and so on. 1. 3 About the Company Ted Baker plc. s a British and world leading clothing brand that operates mainly on three channels: wholesale(45. 1%), retail(46. 6%) and licensing(8. 1%)[4]. Beginning from 1988 in Glasgow, they offer two collections per year, which include products such as: menswear, womenswear, accessories, footwear, born by Ted Baker, watches and etc. [4]. Ted Baker is a listed company in London Stock Exchange(LSE:TED) and share price today is 1243. 0p (13-03-2013 at 16:47) [5]. 1. 4 Press media and future strategies According to The Independent (2012), company beats its profit target by overseas expansion such as a new store in Beijing[6].

Its founder and chief executive Ray Kelvin said that despite of the uncertainty in trading sector, company has made a great start to 2012 with a 16% boost in sales[8]. Ray Kelvin recently spoke to media by emphasising that their future plan is to make Ted Baker a global business by opening more stores in Asia and Latin America. Another future prospect is reducing taxation and costs[7][1]. 2. Financial Analysis of Ted Baker 2. 1 Horizontal or Trend Analysis Table1[1] (Workings in Appendices 1) Table 1 shows a horizontal analysis drawn about Ted Baker, which shows percentage changes in the elements of Income Statement.

It is an effective way of tracking long-term trends. From 2011 to 2012, there is 20% change in revenue, however after deducting costs and expenses this has fallen to 1. 6% as profit for the year. In details, there is a critical change in cost of sales, distribution costs and administrative expenses. As mentioned in part 1. 4, company has expanded its outlets and production in overseas, therefore increase in such costs are natural. In this case, analyzing company’s results vertically would be more beneficial. 2. 2 Vertical Analysis Table 2. [1] (Workings in Appendices 1)

In vertical analysis, it is easier to see elements as a percentage of Revenue. Between 2011-12, the portion that cost of sales takes in revenue has increased however, there is a bigger deterioration in distribution cost. In 2011, 9. 21% of revenue remains as profit but in 2012 this figure decreases to 8. 14%. Despite reduction in costs is one of the strategies of Ted Baker(part 1. 4), analysis illustrates that costs increase each year. 2. 3 Ratio Analysis 2. 3. 1 Profitability ratios Profitability Ratios Type 2012 2011 2010 Return on Capital Employed (ROCE) 8. 02% 31. 11% 28. 40% Operating Profit Margin 11. 26% 12. 86% 12. 09% Gross Profit Margin 61. 31% 61. 68% 61. 09% Table 3[1] [9] [10] (Workings in Appendices 1) Profitability ratios are basically figures to measure if the company is doing well in the terms of profit[13]. ROCE ratio has increased in 2011 but in 2012 it deteriorates by 3%. This fall indicates that company was not successfully getting high returns as a percentage of its resources available, compared to 2011. Operating profit margin figures in the table above show the return from net sales[13].

However profit margin ratios are high enough for the 3 years, there is a fall from 12. 86% to 11. 26% during 2011-12. Sales revenue increases with a higher rate than gross profit so there is a poor control of cost of sales and expenses. Gross profit margin illustrates the proportion of revenue left after deducting cost of sales[13]. During 2010, 2011 and 2012 this ratio has not changed significantly and loosing approximately 40% of revenue after cost of sales is natural for a company in textile-apparel industry as they use relatively more raw material than other industries.

Generally, the profitability ratios shows that between 2010-2011 there is an increase in the profitability of the company, however from 2011 to 2012 there is a slight decrease in companies profit for the reasons of higher costs and expenses. 2. 3. 2 Liquidity ratios Table 4. [10] [1] [9] (Workings in Appendices 1) Liquidity Ratios Type 2012 2011 2010 Current Ratio 1. 98:1 2. 14:1 2. 36:1 Quick Ratio (Acid Test) 0. 86:1 1. 05:1 1. 19:1 Liquidity ratio is a kind of analysis that measures the ability of a company to repay their short-term debts and higher liquidity means higher margin of safety[12].

In Table 4, current ratio shows that in 3 years company kept their current assets higher than current liability so Ted Baker was financially healthy[12]. However, the ratio falls from 2. 36:1 to 1. 98:1 between 2010-12, which might be a problem in the following years. Because Ted Baker is operating in apparel clothing industry it would be more beneficial to analysis the company’s liquidity by using acid test ratio, subtracting inventory[11]. Apparel-clothing industry companies are highly dependent on inventories. However for a retail company slightly low quick ratio is casual, margin of safety of Ted Baker is deteriorating each year.

In 2011, a quick ratio of 0. 86:1 shows that company is not currently able to pay its short term-debts. 2. 3. 3 Investor ratios Table 5. [9] [1] [10] (Workings in Appendices 1) Investor Ratios Type 2012 2011 2010 Dividend payout ratio 45. 28% 41. 80% 31. 41% Dividend Cover 2. 21 2. 39 3. 18 Dividend yield 6. 12% 5. 98% 7. 13% Earnings per share 51. 68p 49. 29p 54. 60p P/E Ratio 7. 40 6. 99 4. 41 Investor ratios are critical figures for investors to assess the amount of return on investment. Dividend payout ratio describes the amount paid to shareholders as a percentage of what could be paid[12].

From 2010, the percentage is going up each year from 31. 41% to 41. 8% and 45. 28. However investors positively look this increase, it also indicates that there will be fewer amounts left to reinvest. Dividend cover is earning available to shareholder as a ratio of company’s net income[11]. This ratio falls from 3. 18 to 2. 39 in 2011, and to 2. 21 in 2012. This shows that in 2010, for each ? 1 profit, Ted Baker could pay its shareholders 0. 32p but now in 2012, shareholders might only get 0. 22p from each ? 1 of net income[1]. Dividend yield ratio shows how much Ted Baker pays out in dividends in a relation to share price[11].

Market value per share has increased with relatively less rate than share price and consequently, return from holding shares has increased from 5. 98% to 6. 12% in 2011-12. In apparel industry, the average yield is 1. 1%[3], which is very low compared to Ted Baker results. Earning per share ratio is simply the profit coming from each share[12]. There is a significant fall between 2010 and 2011 but in 2012 Ted Baker recovers some part of it to 51. 68p, which is still about 3p less than the one in 2010. Although the available amount to shareholders is increasing each year(from ? 66315 to ? 5185[1]), there is a relatively higher increase in number of shares in issue. PE ratio shows the anticipation of investor’s expectation in the future[12]. Table 5 depicts that the expectations from investors are increasing from year to year. The apparel industry average of P/E ratio is 22. 0[3], which is more than twice of Ted Baker’s This means that Ted Baker shareholders are less confident about the future earning power of the company compared to other businesses in the industry. The high P/E value in 2012 shows the company is more risky than in 2010 and 2011. 2. 3. 4 Solvency ratios Table 6. [1] [9] [10] (Workings in Appendices 1)

Solvency Ratios Type 2012 2011 2010 Financial Gearing 1. 64% 1. 99% 1. 95% Interest Cover 120. 74 times 804. 40 times 197. 82 times In part 2. 3. 2, Ted Baker’s ability to meet short-term obligations has mentioned, in this part by solvency ratios, the ability to pay long-term debts and the relationship between debt and equity financing will be discussed. Financial gearing ratios above show to what extent Ted Baker uses its long-term liability in financing its operations[12]. Results of Ted Baker leverage show acceptable figures because, over 3 years they have not exceed 2% and it falls during 2010-12.

In 2012, the company has only ? 1420(‘000) of non-current liability and ? 85,185(‘000) [1] of equity, indicating that to finance the company only small amount of long-term liability is being used. Lower gearing ratio also means lower financial risk for the company, as well as lower profit fluctuation[11]. Interest cover ratio of Ted Baker illustrates the amount of profit to cover interest payables[11]. In 2010, interest payable could be paid 198 times with profit and in 2011 this figure trends up highly to 804 times. It falls to 121 times in 2012 because of increase in interest payables(from ? 30,000 to ? 201,000) [1].

Generally, the company has not faced any problems about paying interest over the three years. 3. Conclusion As a conclusion, Ted Baker is a listed company that operates as retailer wholesaler and licensing company under apparel-textile clothing company. Recently, this company is growing overseas and sales are increased as a result. However, cost of the company has also increased significantly and as a result, profit increased relatively less in 2012. Generally ratios show that there is higher improvement between 2010-11 compared to 2011-12. There is a slight risk for the company in the short run when inventories are excluded.

However in the long-run the company is not much risky. In investor ratio trends, same scenario is being observed, and although there is a fall from 2010 to 2011, in 2012 the figures start to improve. 3. 1 Recommendation The brand name Ted Baker is currently opening new stores in different part of the world and their future strategy is to expand the range even more. However, the success of new outlets is not certain. Additionally, the results such as: earnings per share, financial gearing dividend yield indicates that company is doing well in the terms of financial health and rate of return.

Although majority of 2012 results are going up, they have not reached 2010 results yet. For the reasons stated above, it could be recommended to investors to “hold” shares in Ted Baker rather sell. Buying new shares can also be recommended for risk takers, because buying can be highly risky and the rate of return could also be high. 4. Limitations Retail industries experience seasonality and because of this it is not so certain when the results are being analysed based on annual report. The interim results would give more accurate outcomes about sales and profit.

When analysing gross profit margin, it is uncertain that if it is high or low because of selling price or cost of sales. The average selling price could not be found in annual reports. The investment that is spent on promotion and advertisement of new stores of Ted Baker is not available to users to guess the potential success. Acceptable ratio for each industry varies and the general rules about ratios might not be accurate for apparel industry. 5. Bibliography 1. Annual Report 2011/12. (2012). Ted Baker London. Ted’s Passport to Success. 2012 (1), (Hard Copy) 2. Richard M. Johns (2006). The Apparel Industry. nd ed. UK, London: Blackwell Publishing Ltd.. 1-124. 3. Yahoo Finance. (2013). INDUSTRY CENTER – TEXTILE – APPAREL CLOTHING. Available: http://biz. yahoo. com/ic/320. html . Last accessed 09th MAR 2013. 4. Ted Baker Official Website. (2013). About us. Available: http://www. tedbaker. com/about_us/content. aspx . Last accessed 14th MAR 2013. 5. London Stock Exchange-LSE:TED. (2013). Ted Baker Plc.. Available: http://www. londonstockexchange. com/exchange/prices-and-markets/stocks/summary/company-summary. html? fourWayKey=GB0001048619GBGBXSTMM . Last accessed 13rd MAR 2013 at 16:47. 6. The Independent-Business news. 2012). Smart Ted Baker beats profit targets. Available: http://www. independent. co. uk/news/business/news/smart-ted-baker-beats-profit-targets-8198352. html . Last accessed 10th MAR 2013. 7. Retail Week News. (2012). Q: Ted Baker chief executive Ray Kelvin. Available: http://www. retail-week. com/sectors/fashion/qa-ted-baker-chief-executive-ray-kelvin/5041478. article . Last accessed 10th MAR 2013. 8. BBC News. (2012). Ted Baker’s sales boosted by overseas growth. Available: http://www. bbc. co. uk/news/business-18406260 . Last accessed 9th MAR 2013. 9. Annual Report 2010/11. (2011). Ted Baker London.

Ted’s Material World. (1), 1-77. Available at:http://www. palgrave. com/business/collis/ba2/students/TedBakerAnnualReport2010-11. pdf 10. Annual Report 2009/10. (2010). Ted Baker London. Ted’s Growing About his Businesses. (1),1-66. Available at:http://www. tedbakerplc. com/ted/uploads/press/ReportandAccounts09_10Final. pdf 11. Donald M. Peterson (1993). Financial Ratios and Investment Results. Toronto, Canada: Lexington Books. 33-126. 12. Barry E. and Jamie E. (2008). Financial Accounting and Reporting. 12th ed. Essex. England: Pearson Education Limited. 259-748. 13. Richard B. (2008).

Financial Ratios: How To Use Financial Ratios To Maximise Value and Success For Your Business. Oxford, UK: CIMA Publishing. 33-131. Profitability Ratios Type Formula 2012 2011 2010 Return on Capital Employed (ROCE) Operating Profit Margin Gross Profit Margin 6. Appendices 1 (Workings) Liquidity Ratios Type Formula 2012 2011 2010 Current Ratio Quick Ratio (Acid Test) Solvency Ratios Type Formula 2012 2011 2010 Financial Gearing Interest Cover 28 January 2012 29 January 2011 30 January 2010 Share price at the year end 382. 4p 344. 7p 240. 7p Weighted number of shares (a)(b) 164,837 154,247 121,415

Dividend announced (a) ?38,572 ?31,775 ?20,823 Total equity attributable to equity shareholders of the parent company (? ’000) ? 85,185 ?76,024 ?66,315 Total dividend per share (b) 23. 4p 20. 6p 17. 15p Investor Ratios Type Formula 2012 2011 2010 Dividend payout ratio Dividend Cover Dividend yield Earnings per share P/E Ratio 2. 1 Horizontal and Trend Analysis (Workings) Revenue (All Calculations in this sector has been calculated with the same method) 2. 2 Vertical Analysis (Workings) E. g. to find cost of sales percentage, take revenue 100%, (All Calculations in this sector has been calculated with the same method)

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