Learning Lessons From The Ted Baker Profit Warning

12th Jun '19 by Ben Hobson

6 comments 5887 reads

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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Mike888

12th Jun '19

Price drop prior to a profit warning is a poor predictor however it is obviously a measure of sentiment. There are many clues available to investors of potential trouble ahead, it is these that generally give a better base to understand potential future calamity.

However once it's happened you need to decide on next steps, personally I immediately sell and wait for the market to tell me what to do next. The excellent stocko article is good reading for anyone who has not yet digested its content.

Gromley

A great reminder of the excellent Profit Warning Survival Guide [PWSG] and a nice case study Ben.

This is a general theme that I have been looking at quite closely recently so there are a few other observations / ideas I would throw out there.

Predictability - I would say that it was clear that there was a risk of such a profit warning from Ted Baker (LON:TED) . You mentioned already that profit warnings often follow a period of share price decline and also mentioned the mixed view of multiple profits warnings. There is also though I believe something to be learned from the nature of previous warnings or outlook statements.

In their March results announcement their "outlook" statement, included lots of waffle about strategy and only after several paragraphs got to what I would actually recognise as the outlook statement :

"Trading continues to be impacted by ongoing consumer uncertainty and an elevated level of promotional activity across many of our global markets ..."

You can perhaps argue that market back drop should therefore have been included in the expectations. Often though this seems not to be the case.

This weeks profit warning says :

Ongoing consumer uncertainty in a number of key markets and elevated levels of promotional activity across our global markets have resulted in extremely difficult trading conditions during the financial year to date.

So, essentially everything has gone as could have been predicted and yet this is still quite a nasty profits warning. That's another reinforcement of the PWSG I think - there really was no reason to be continuing to hold the shares after the last warning, until there were clearer signs of recovery. If Ted had been able to report in this update that they were trading inline I doubt that the share price would have gone up by much and it was almost unthinkable that they could have reported trading sufficiently ahead of expectations to send the shareprice skywards, without there being some tell-tale signs in advance.

To be fair there is a bit of "do as I say, not as I do" in this view. I do currently hold shares in Bonmarche Holdings (LON:BON) (but my reasoning is that this something of a special case because of the bid) and recently bought Shoe Zone (LON:SHOE), before having second thoughts and selling again (I would argue that they did not have a "profits warning" , but that's splitting hairs - they issued a trading statement that the market did not like)

On thought/question though on the severity of the warning - in the article Ben indicates this to be a severe warning because of the 29% fall (vs 19% average). I wonder how far the scale of the fall is related to the mood of the market, rather than the severity of the miss itself?

Observationally it seems to me that over the last 6-9 months reactions to profit warnings have been pretty extreme and I put this down to the "mood of the market". Also in research for another article I found that astonishingly more than 100 UK listed companies saw their share price fall by 20% or more in May - I would hazard a guess that is unusually high.

That market fragility reinforces to me that these are ideal times to be re-reading the PWSG. If you had done so, then you should not have been holding Ted Baker (LON:TED) into this latest profits warning and you wouldn't be buying now either - A "sure fire bet" now that I have said that to see outperformance over the next few months :~/

Peter Craven

13th Jun '19

Ted Baker has an average compound (Dividend and Price) over the last 8 years of -6.08%.
Another red warning sign of this company as a prospect investment is the company web site. Its focus is the retail customer with very poor investor orientated content.

DO NOT TOUCH THIS COMPANY WITH A BARGE POLE.

tony akram

Peter ,

Sadly I got stung on this share so trying learn some lessons you mentioned

''Ted Baker has an average compound (Dividend and Price) over the last 8 years of -6.08%.''

Where or how would I get this information from or is it a formula ?

Thanks

Hi Tony,

My research method for those shares I decide to fully investigate is to create a spreadsheet file for each company. The starting point is to download the entire price and dividend history for the company, then do a data cleanse on the dividend information.
I calculate the compound gain from the dividend data including the Ex divi dates and the price data.
Have done this for 53 companies in total. Each spread sheet is updated at periodic intervals of between 21- 91 days. Its quite a lot of effort.
Next stage in my process is to export the data for each company into a fully bespoke stock screener where I can set the weighting for the parameters I use. At the moment I only use average 8 year compound gain and 2 year dividend increase forecast data with parameters equally weighted. From there its down to reading the reports and looking at the company presentations.
I believe the Stockopedia system has flaws:-
1. - Its has short time perspective s why annual portfolio rebalancing is recommended. This leads to a trading culture.
2. - Stockopedia acknowledge that momentum investing does not work well in a falling market.
3. - Stockopedia acknowledge that value investing does not work well in a bull market.
4. - Stockopedia concept of value is wrong. It is based on a cheap price and will flag up companies without any long term prospect of growth such as Royal Mail Group which currently has a Value rank of 97!

Mail me at peter.cra@btinternet.com for a copy of my Ted Baker analysis spreadsheet.
Final comment. This game is 1% inspiration and 99% perspiration. What I have learned is good is 16% compound gain on average over many years just like Buffett. I can now invest with "Cautious" confidence having made many mistakes over the years I have been investing.

Regards,
Peter Craven.

Howard Adams

16th Jun '19

Hi Tony

This might not answer your question directly, but in case it might help.

If you go to the Stocko Glossary and use the search term CAGR. All the Stocko metrics which provide data on CAGRs list.
https://www.stockopedia.com/ratios/

There are many under the 'Growth' category.

Then also, one I find very useful, under the 'Price History' category, the ' 5 year Price CAGR %'.

I have created a screen to seek out stocks which have attractive CAGRs for 5yr and 3yr.

I also use the 'Ratio vs Ratio' test to identify if a 3yr CAGR is at least the same (or greater than) the 5yr CAGR for each metric I test (e.g. EPS, Sales, Div, ....).

Usually on a creeining, only a few options are identified. But they are usually worth looking into.

However, by suppressing some tests other options, which are close to passing all tests, also appear.

I have found these CAGR screening to be a good way to spot attractive options.

Possibly, more importantly though, I use it to test screen current holdings or possible buy options. When red failure tests occur they tell me quite a bit about the stocks and have thus informed many buy/add/hold/slice/sell decisions.

I hope this helps.

Regards
Howard

Learning lessons from the Ted Baker profit warning

Do profit warnings really come in threes?

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Ben Hobson

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