Monday 2 December 2019 2:17 pm

Ted Baker share price sinks into acquisition territory after £25m balance sheet error

Ted Baker has warned investors that it is set to take up to a £25m hit after overstating the value of inventory on its balance sheet.

The retailer has appointed Freshfields Bruckhaus Deringer to investigate the issue and told shareholders that it estimates an impact on the value of the clothing stock of between £20m and £25m.

Read more: Ted Baker books a £23m loss, knocking shares further

However, the error would have “no cash impact” and would relate to prior years, the firm added.

The Magic Circle law firm will appoint independent accountants to undertake a “comprehensive review” of the issue, Ted Baker said.

The team will report to a sub-committee chaired by independent director Sharon Baylay.

“Ted Baker is committed to ensuring the independent review is completed in an efficient and transparent manner and will update the market as appropriate,” Ted Baker said in a statement.

“Whilst the review is ongoing, the company will not comment further.”

Ted Baker’s share price dropped 11.5 per cent to 352p in early trading.

The revelation comes just a week before Ted Baker is set to announce its trading update for the four months to 7 December.

CFO starts spring clean early

Liberum called the discovery “less than ideal”.

“In our view, it is indicative to some degree of the very early stage work that the new and highly regarded CFO, Rachel Osborne, is undertaking,” the broker said.

“The board believes that any adjustment to inventory value will have no impact on the year-end cash balance and will relate to prior years. We keep our recommendation under review as there are further moving parts that may need consideration, which naturally lead to some additional questions.”

The company saw shares crash 25 per cent in early October as it revealed it swung to a £23m loss in the first half of its financial year.

It pointed the finger at a challenging trading environment, acquisition costs and a £2m hit from the fallout of misconduct allegations against its founder.

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Meanwhile costs rose from the opening of a US warehouse last year.

It has warned that full year sales could fall below last year’s figure if trading conditions do not get better.

Ted Baker’s stock pared the losses slightly but was still down 9.6 per cent at 359.4p at 2pm.

System error, but is it systemic?

“We can only surmise that this is likely to be a systems-related issue,” said Peel Hunt analysts John Stevenson and Jonathan Pritchard.

“For another retailer, we would be relatively sanguine. Ultimately it is an accounting slip rather than a cash issue, but for Ted this compounds the pressure on already weakened investor confidence levels.”

Steve Miley, a senior market analyst at online trading platform Ask Traders, said Ted Baker must now “clean up its act”.

“It’s worth noting these issues relate to a time when Ray Kelvin was at the helm,” Miley said. 

Other observers suggested that Ted Baker’s error could cost it a lot more simply by scaring investors into thinking it does not have a tight grip on other areas of the business.

“In light of these revelations, the company needs to conduct a thorough evaluation of its entire business to ensure there aren’t any other mistakes hiding in the woodwork, and seriously review its supply chain management policies,”  Colin Elkins, global industry director for process manufacturing at software firm IFS added.

Read more: Ted Baker seals deal to expand into Japan

Acquisition territory?

London Capital Group’s Jasper Lawler said the only good news for investors is that Ted Baker’s weakened share price makes it ripe for an acquisition.

“If there is any silver lining, we think it comes in the form of acquisition potential,” he said. “Ted Baker shares have now lost three quarters of their value this year and consolidation is already happening in the luxury sector as evidence by the LVMH purchase of Tiffany. A household name is now up for grabs at bargain basement levels.”