This week’s profit warning from the fashion retailer Ted Baker carried some of the classic hallmarks you often see on these occasions. Profit warnings are right up there with some of the most gut-wrenching events to hit investors. That’s because they cause massive uncertainty about whether the problems are easily fixable... or an early clue to bigger trouble ahead.

In the case of Ted Baker, this profit warning wasn’t actually the first. There was another back in February, which related to its previous financial year (ending in late January). So this week’s warning came just five months into its new 2019/20 financial year. Pre-tax profit forecasts have been pegged back to £50-60 million versus previous analyst expectations of more like £70 million. To be cutting expectations this early suggests the company is already reeling from difficult trading conditions.

So how did this news affect the price?

On the day of the trading update (Tuesday, 11 June), Ted Baker shares fell by 29 percent. That sliced its market cap to around £425 million. Research by our analysts at Stockopedia suggests that the average profit warning causes an immediate fall of 19.2 percent on average. So this was a particularly bad one. (You can find that research in our Profit Warning Survival Guide).

But it isn’t just the ‘fall on the day’ that causes so much damage. A lot of the price action in the months prior, and after, the profit warning is often both negative and predictable.

Our research looked at 245 profit warnings in mostly smaller stocks between 2013 and 2016. It found that the prices of these stocks fell by six percent on average over the six months prior to the warning.

With Ted Baker, of course, bad news was already swirling in the market. On the upside, it reported solid trading over Christmas 2018. But that was followed by a profit warning for the full-year and then the departure (under a cloud) of its founder, Ray Kelvin. All this aside, shares in Ted Baker slipped by 10 percent in the six months to this week. So the steady low-level negative momentum was there, and it was a warning.

Do profit warnings really come in threes?

So what happens next? Well, there’s a well known saying in the stock market that profit warnings come in threes. For…

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