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Ted Baker (LON:TED)

  • Share price: 397.6p (pre-open). 
  • No. of shares: 44.6 million
  • Market cap: £177 million

Independent review of inventory

I'm surprised the shares are down by less than 10% in early trading.

Ted Baker has identified that the value of inventory held on its balance sheet has been overstated.  Based on preliminary analysis, the Board estimates an impact on value of £20m to £25m.

To give the estimated impact some context: TED's inventory was previously valued at £210 million (August 2019), which was also the company's net asset value.

With inventory and net assets both being written off by around 10%, I'm surprised that the market cap is down by less than 10%.

We've had our fair share of accounting problems over the last few years, and I think investors need to be wary of:

  • Early estimates being too optimistic.
  • Other accounting problems being discovered, after a more thorough investigation ("there's never just one cockroach in the kitchen").
  • Accounting problems being indicative of wider ethical problems in a company.
  • The company being unable to generate the expected level of profitability, when it starts telling the truth about its finances.

For all of these reasons, I think investors should be extremely cautious when a company makes an announcement like this.

On the third of the above four points, it should be pointed out that ethical problems at TED aren't a big surprise. Its founder Ray Kelvin left the company about a year ago, in the midst of a "forced hugging" scandal. Company culture was evidently not what it should be. Bad corporate culture has a funny habit of creeping into the financials.

And on the fourth point: overstated inventory means that historic profits were overstated by that amount, too.

While this doesn't automatically rule out a recovery, it means we need to bring extra scepticism when it comes to…

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