Ted Baker set for a new phase

It’s important to remember that Ted doesn’t report conventional 'like-for-like' sales, its rationale being that the business is increasingly multi-channel and digitally-focused, so a like-for-like measure would only provide partial evidence of progress. As far as the year ahead is concerned, City analysts think the group is about to enter a phase of lower capital spending, having invested heavily in its operations over recent years. True, the share price demands that new investors stump up a high multiple of earnings, but we think that's worth paying as cash flow and returns on capital employed begin to improve.

Crucially, the brand continues to resonate not just with UK consumers – who could find themselves on tighter budgets this year – but overseas shoppers too, as Ted grows via stores and local websites, despite intense competition among fashion retailers. Over Christmas, the group opened a new store in Montreal, concessions in Germany and Spain and new stores via licence partners in Malaysia, Mexico and Qatar. It also operates a comprehensive wholesale channel too and, in its first-half results, reported a 14.1 per cent rise in wholesale revenues (or 10.2 per cent at constant currency rates) to £78m. That reflected strong performances across the UK and North America; profit margins for this division are largely stable, too.

True, management didn't offer much insight into the state of profit margins over Christmas, but they did assure shareholders that gross margins are tracking in line with expectations. Ted also expects to finish the financial year in a 'clean' stock position, which should help put some concerns to rest. Broker Peel Hunt was worried when Ted went into full sale before Christmas Day. But this actually had a positive effect in driving higher online sales traffic – a good move considering the dire footfall figures recorded on the British high street during late December and early January. Going forward, to help stores and websites serve customers better, Ted is also trialling a system where stores could ship products to online customers from the shop floor for items that are out of stock on the website.

It’s not just operational developments that could help drive demand for the shares this year. As the business enters a phase of lower capital spending (capex), analysts at Liberum, another broker, highlight the potential for a rise in free cash flow and improved returns on capital employed (ROCE). A levelling out of capex, as well as consistent sales and profit growth, underpin the broker’s forecast of £151m-worth of free cash flow over the next three years – compared with £71m generated over the past decade. Analysts expect the group to pass an investment “peak” by the end of the current financial year, and thus cash flows should improve materially between now and 2020. Yet Ted has a consistent track record for returning cash to shareholders anyway. It has returned around 44 per cent of post-tax profits, even though capital spending has tripled over the past five years. The assumption is, if investment requirements ease off, shareholder returns could become more generous.

As for return on capital, progress could hit a lull during the current financial year as the investment cycle ends. But, as sales into new markets start to mature, analysts expect ROCE to increase to 20 per cent by 2021, compared with 17 per cent in 2017. True, that assumes that gross margins remain roughly stable, but analysts reckon Ted’s “disciplined” approach to growth will ensure this is the case. Better still, operating margins are expected to grow by around 80 basis points by 2020 thanks to tight cost control and good operational leverage.