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Another blow to customer discretionary as the slowdown bites

Friday, 4th October 2019 12:39 - by Shant

We have seen yet more profit warnings hurting some notable brand names this week, with Ted Baker making the headlines yesterday after it announced a loss of £23mln for the 6 months to the 10thof August.  Adding to the misery, Chairman David Bernstein also said that if trading did not improve, then the results for the second half of the year would also be down on the same period in 2018.   Heavy discounting has been one key factor as a consequence of tight competition, so while the retail sales figures in the UK have been holding up, the savvy consumer cannot be blamed outright.  

 

As the chairman elaborated, "trading conditions have been characterised by unprecedented and sustained levels of promotional activity across the sector", but as we have asserted many times before, in line with the business cycle, previous years will be hard to match in natural circumstances, but with the added burden of fighting against the global slowdown and the chaos which is Brexit.  "Distressed discounting" was also cited by the chairman, so we can only assume that other brand names in the clothing sector are feeling the heat and we will no doubt hear more as the weeks and months pass.

 

There is a seasonal factor to consider in the very near term, as well as the impending deadline day for Brexit, and although the signs are that the latter may well be extended, uncertainty was expected to heighten going into the end of the month.  As such, Ted Baker's results will be closely monitored over the Christmas period to see whether there are more embedded concerns over demand.  The brand was soured somewhat by the eventual resignation of Chief Executive Ray Kelvin, who was accused of misconduct after reports of 'forced hugging' was made public.  

 

Blaming the woes of the UK High Street is one factor that cannot be classed as significant in its performance as analysts have noted that online sales have been hit also.  One notable dynamic which tends to resurface in a potential consumer led slowdown in demand is that of underperformance in inter-consumer group names.  Top/high-end labels tend to retain their customers a little better than their lesser rivals, and Ted Baker can be classed within the latter category, much in the same way as say, Debenhams compared to Selfridges.  Indeed, earlier this year, Teb Baker ended its partnership with Debenhams to sell children's clothing, choosing to switch to Next as its outlet.  However, this came in the aftermath of the announcement that Debenhams was to close 22 of its stores.

 

Nevertheless, this is yet another sign that there is a contraction on the horizon and the fierce competition - whilst beneficial to the consumer - means that we can expect more profit warnings in this sector.  Some would say that Ted Baker has exceeded expectations in the last 5-10 years - perhaps a little longer - so there is an element of mean reversion (if you will) to consider in the latest developments.  Certainly, in my younger years, Ted Baker was not as prominent as it now is, so one could also argue that they have been 'batting above their average' for some time, putting the latest performance figures into context.

 

On Thursday, shares plunged almost 40%, with stock prices now less than half that seen in the middle of September.  We tipped £11.20 mid-month but now trades below £5.00 as of Friday (morning) 04 October.

 

 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.

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