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Fashion groups are supposed to have clothes in their closets that are to die for, not skeletons. But a whole boneyard has been rattling off the rail at UK retailer Ted Baker since chief executive Ray Kelvin went on leave in December. New boss Lindsay Page — who had promised to improve working capital — disclosed on Monday that inventories were historically overvalued by up to £25m.
Investors have reached a similar conclusion about Ted Baker’s shares. A drop of 10 per cent on the day brought the loss for the year to three quarters. Even after revisions, inventory levels at Ted Baker are too high compared with peers. The departure of Mr Kelvin in May, following allegations of unwanted physical contact with employees, which he denies, has left this business critically wounded.
Inventories grow when slowing economies put a brake on sales. They may also show that a fashion retailer has lost its grip on what customers want. At Ted Baker, they doubled from 2015 to £226m last year. Mr Page had not expected accounting revisions to contribute to working capital cuts. Without them, his progress had been slow.
Ted Baker may struggle to run down its physical stock overhang profitably because wholesale volumes have been declining sharply. They fell 12 per cent in the six months to August. Gross margins fell 6 percentage points.
Inventories were 36 per cent of Ted Baker’s sales last year. The implied 10 per cent reduction moves that figure to 33 per cent. That is still steep compared with peers. At Superdry, a UK high-street rival with problems of its own, they equated to 22 per cent of last year’s sales. Next and Inditex of Spain, the master of fast fashion, maintain levels barely in double digits.
Bringing Ted Baker in line with Superdry would imply an additional inventory write-off of about £60m, close to City ebitda estimates of £72m this year. The shares are close to lows last seen in 2008. Ted Baker looks increasingly like a business whose bone structure the company doctors of the buyout industry should size up.
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