Over the past five years, the Ted Baker (LSE: TED) share price has lost 95% of its value. But over the past 12 months, the stock has recovered some of these losses. It is up 13% since the middle of November last year.
A string of disasters has impacted the company since the end of 2016. The pandemic was just the latest unfortunate event to hit the group.
Revenues for the 2021 financial year were down around 50% compared to 2019 levels. Meanwhile, group net income slumped from £47m to a loss of £87m.
Still, it looks as if the business is heading in the right direction. According to its latest trading update, which covered the 16 weeks to 14 August, sales increased 50% compared to pandemic levels. The overall trading margin improved by 5% due to higher full-price sales. The company has moved away from discounting to drive profit growth.
Ted Baker share price catalyst
Management is expecting this trend to continue into the second half of its 2022 financial year. A new e-commerce platform, which has been delayed, will be launched at the beginning of 2022, after the critical Christmas sales period, and its new collections for Autumn/Winter offer have been “positively received“.
These developments show that the business is moving in the right direction. Nevertheless, it has its work cut out to return to growth over the next few years. One of the main reasons why Ted Baker started to struggle in the first place was the company’s lack of financial flexibility.
In the fast-moving fashion sector, where one season can make or break a company’s performance for the year, businesses need strong balance sheets to weather potential periods of underperformance.
Ted Baker lacked this vital quality. Therefore, when the group’s profit margin started to deteriorate in the years before the pandemic, its financial position became increasingly weak. When the pandemic arrived, the organisation was poorly placed to navigate the hostile environment.
Back from the brink
After slashing costs and raising money from investors, the group has come back from the brink. Still, I think it is challenging for me to determine how much the organisation will be worth five years from now. If Ted Baker’s clothes start flying off the shelves and sales grow for the next few years, the stock could be worth multiples of its current value.
However, if the group struggles to regain its mojo, the stock could continue to languish.
Considering this challenge, I would not buy the stock for my portfolio today. I think there is just too much that can go wrong. After five years of uncertainty, it is not easy to establish if Ted Baker can return to growth in the next five years. I would rather own one of the company’s peers. Other firms in the premium and luxury fashion retail sector, like Burberry, have stronger balance sheets and greater financial clout. This will help them fight for market share in the incredibly competitive fashion market.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
This post was originally published on Motley Fool
