There's an old adage 'you get what you pay for', which in the world of share tipping seems to defeat the point of value stock selection. However, there are some instances when we think it's worth paying a premium for a quality stock. In this case, it's fashion house Ted Baker (TED). Ted has not only outperformed over the economic downturn, but it boasts sector-leading margins and a growth rate that most of its peers can only dream of. The company is also only just scratching the surface of international expansion, so there's also plenty of room to grow in new markets. And with the shares significantly below highs reached earlier this year - an anomaly in our view - the valuation has fallen, making this an opportune time to buy.
- • Superior EPS growth this year
- • Careful overseas expansion
- • Strong brand
- • High-quality company
- • Shares have slipped from recent highs
- • Extra spending needed this year
- • Valuation still high
Ted Baker sells itself as an English 'lifestyle' brand, selling clothes priced somewhere between Top Shop and Burberry (BRBY), in the 'affordable luxury' category on the high street. When you buy Ted Baker, what you pay extra for is chic, well-tailored garments and a nice shopping experience, two things you won't get from the likes of H&M and Zara. These qualities are giving Ted a real consumer following, and the trend is mirrored in recent trading. Over the past three years, compound annual operating profit growth has come in at 19 per cent compared with a global peer average of just 7 per cent, which includes heavy hitters such as Burberry, Ralph Lauren (RL), Hugo Boss (BOSS), Inditex (Zara) (ITX), Next (NXT), H&M (HM), Urban Outfitters (URBN) and SuperGroup (SGP). Last year alone, retail sales soared by a quarter to £259m, compared with a 5 per cent average across the peer group, while revenue per sq ft - a good way to measure comparable sales growth - rose 11 per cent to £780m.
In the UK and Europe, two markets where consumers are feeling squeezed and which account for 77 per cent of retail sales, Ted's revenue grew by a fifth last last year. Meanwhile, in the US and Canada, growth hit 38 per cent, and the label is only just starting to penetrate the Middle East, Australia and Asia, where upper double-digit growth is being achieved. Higher spending is needed this year as the company expands its footprint, but we think it's unlikely to materially impact performance.
| TED BAKER (TED) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,918p | MARKET VALUE: | £838m | |
| TOUCH: | 1,916-1,920p | 12-MONTH HIGH: | 2,360p | LOW: 1,400p |
| FORWARD DIVIDEND YIELD: | 2% | FORWARD PE RATIO: | 22 | |
| NET ASSET VALUE: | 256p | NET DEBT: | 8% | |
| Year to 25 Jan | Turnover (£m) | Adjusted pre-tax profit (£m) | Adjusted earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 216 | 27.1 | 47.1 | 23.4 |
| 2013 | 255 | 31.5 | 55.9 | 26.6 |
| 2014 | 322 | 40.0 | 70.7 | 33.7 |
| 2015* | 370 | 46.5 | 82.0 | 35 |
| 2016* | 404 | 49.8 | 88.0 | 38 |
| % change | +9 | +7 | +7 | +9 |
Normal market size: 300 Matched bargain trading Beta: 0.01 *Peel Hunt forecasts | ||||
The quality of the underlying business is a further reason to like the shares. The operating margin is a healthy 12.6 per cent, while return on equity was 27.4 per cent over the past 12 months, beating the global sector average of 25 per cent (excluding Next). The shares, though, have always commanded a punchy rating relative to their peers, and one we've not always been willing to stump up for. However, the combination of superior growth and solid fundamentals with the recent significant fall in the share price from highs of £23 reached earlier this year, means the rating has come down and the shares are now trading on a forward PE ratio of 22. This offers investors a chance to buy in at a 9 per cent discount to the historic two-year average and at a price tag on par with peers. Yet earnings expectations are still as strong as ever. Analysts believe EPS will rise 16 per cent this year and 7.3 per cent next year. The dividend-adjusted PEG ratio, which takes into account future growth, is a reasonable 1.1. And if the shares rebound to £23, as we believe they could easily do, investors would be in for a 20 per cent upside.
