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Steady Teddy

Created:
11 June 2008
Written by:
Alistair Blair

I have always had a soft spot for Ted Baker, the quirky fashion label. I don't wear Ted Baker - I'd feel far too self-conscious. But its credentials as an investment have always seemed very compelling. I own a few. With its shares down into almost single-digit territory on the price-earnings front, could it be a buy?

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Founded 20 years ago as a single shirt shop in Glasgow by Ray Kelvin, a quirky guy who started in the rag trade very young, Ted Baker has in recent years begun to amass a sizeable cash pile, currently standing at £13m and projected by some to double over the next two to three years. This provoked a storm in a teacup at the company's annual meeting on Tuesday, when some shareholders voted against a routine renewal of its authority to buy in shares. The supposed issue is that Ray Kelvin already owns 40 per cent of the company, so his sway would increase with further buy-ins. In my view, this is a non-issue, although it could become one. More significantly, at £13m and rising fast, the cash is a big indicator of the company's success and conservative strategy.

High fashion is not an obvious investment as the economy goes into reverse, and if one bought these shares now, one would have to be prepared for a deterioration in sentiment which could cause a serious loss. But if Ted Baker continues to plough its furrow, it is going to be worth a lot more than 10-times earnings (its rating based on 10 per cent earnings growth for the year to January 2009) when the global economy gets back into gear.

Ted Baker is clearly a solid company. Its growth to sales last year of £140m has been 100 per cent organic. Last year, sales grew by 13 per cent. In its early years, it distributed a lot of product via other retailers, but it has steadily deployed its profits over many years into building up its own retail outlets, which now represent over £100m of sales. The close control over the store space in which its products are sold, which is only possible via ownership of its outlets, enables the company to build the allure of its brand. Last year, own-store sales grew by 16 per cent, and the same is on for this year. Don't misinterpret this headline number: Ted Baker's retail estate grew by 7 per cent, so that the like-for-like increase in sales was only half the headline figure. But all the same, you can't sniff at that, and at £600-odd per square foot, the sales density as it is known, is very respectable. And meanwhile, Ted Baker's cash pile last year grew by £2m.

Ted Baker's prospects are based on both geographical and product expansion. The company probably has the UK pretty well covered for a brand of this type, but the rest of the world is its oyster. Own store sales in the US last year were less than $20m. Many UK retailers have come a cropper in the US, and Ted Baker did have a hiccup with one location which did not work. But it now has eight stores there and should be facing many years of steady growth by reproducing its quirky retail formula in new locations. Then there's Europe, the Middle East (being tackled via a licensing arrangement) and the Far East.

Ted Baker has also proved adept at expanding its product range. Its core area is formal and semi-formal menswear - it sells a lot of suits. But womenswear has been built up in just the same steady way as the retail presence and the brand is licenced to a variety of specialists in other areas from watches to mobile phones and perfume. Licence income is, of course, a real honeypot and will undoubtedly become a bigger one as the brand increases its global presence. The portfolio of licencees is carefully managed to ensure that the brand's credentials are maintained.

Ray Kelvin is 53 and shows no sign of wanting to do anything except steadily build Ted Baker. The board is solid - finance director, Lindsay Page, has been in place since the flotation 10 years ago. They don't overpay themselves.

If we're in for a serious recession, Ted Baker will slow up. I don't know where its shares will be this time next year. But I feel pretty sure about where they will be in five years.

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Read more of Alistair's columns at his IC home page.

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or you can e-mail Alistair directly at: a7461blair@pobox.com

Alistair Blair is a past winner of the Business Writer of the Year Award, and has worked in investment banking and fund management.

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