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Analysis done by Financial Ratio Analysis Helpers
Ted Baker operates through three main channels – Retail, Wholesale, and Licensing. Retail channel has performed well in the past few years (Ted Baker PLC, 2018, Annual Report). The company has been performing extremely well given the challenging global environment for trade. Revenue growth has been declining year on year basis as company indicating the company is transiting from growth phase of business to sales maturity phase which explains the strategy of the company to invest heavily on newer markets and infrastructure.
Gross margin of the company has been more or less the same as compared to last year 61% reflecting a change in the mix of full price and retail sales and full price sales through retail channels. Retail Gross margin has increased from 66.1% to 67% reflecting better retail outlet sales. Wholesale sales carry low gross margin as compared to retail sales of 43.3% (2017: 45.1%) reflecting previous year non-recurring foreign exchange gain which is not expected to occur and a higher proportion of sales to territorial regions reflecting lower margins (Ted Baker PLC 2018).
Net Margin of the organization has been down from 9.77% in 2016 to 8.91% in 2018 due to a number of reasons. Selling general and administrative cost has increased by 49.8% in 2016 to 52% in 2018 due to the deployment of new IT system to support growth and investment and centralization of operation has resulted in the growth. Also, online marketing cost to raise awareness about e-commerce site has increased which has been offset by running a single European distribution centre.
Return on Asset has been decreased in the last 2 years from 15.47% in 2016 to 12.08% in 2018. This is because of the rise in inventory 26.4% increase from 2016 to 2017 resulting in higher current assets and organization has higher property, plant and machinery level due to which it has higher capital expenditure. Capital expenditure includes the cost of opening and refurbishing stores, outlet and concessional stores and IT expenditure for centralization. In 2018, impairments were recognized by the company and lower capital expenditure in IT resulting in similar assets as compared to 2017. Ted Baker’s relatively strong ROCE change is because of two factors: Earnings and capital requirements.
The current ratio of Ted Baker has been decreasing each year from 1.75 in 2016 to 1.52 in 2018 resulting in lower ability to meet current liabilities. Total working capital has been increased from £136.8m in 2017 to £168.6m in 2018. Working capital comprises of trade and receivables, inventories and payables. The increase in working capital was mainly due to a rise in inventories from £158.5m in 2017 to £187.2m in 2018 reflecting the growth of business and stock on hand for territorial and wholesale partners. Change in working capital has also resulted in lower cash flow from operating activities. Inventories level has also been impacted by foreign exchange rates.
Quick Acid ratio determines the ability of company to repay its current liabilities with quick assets. Quick ratio (Acid-test ratio) of 0.57 in 2018 implies the company’s inability to meet its short-term liabilities. It is a more accurate measurement of the company’s liquidity because the inventories in the industry are considered as relatively illiquid in the fashion industry.
This has resulted in an increase in borrowing for the organization from £95.2m in 2017 to £111.8m in 2018.
Days sales outstanding (DSO) signifies the no. of days it takes to collect the payment by the organization after it has made the sales. Ted Baker has been maintaining a healthy 25 days sales outstanding while its average receivables have increased over past implying a higher number of credit sales to its retail and wholesale partner as per analysis done by our Finance experts help online service providers.
Inventory turnover has declined from 1.55 in 2016 to 1.38 in 2018 implying the rise in inventory level due to increase in wholesale (14.1% from 2017) and territorial (17.6% from 2017) channel partners. Inventory has also been increased because of increase in sales through e-commerce platform (39.8% from 2017) and increase in no. of retail stores requiring the organization for a higher inventory level to support the growth and progression of the brand globally (Morningstar 2018).
Cash conversion cycle (CCC) has been continuously increasing reflecting the poor company’s operation to convert its investment into inventory into sales and cash. CCC has increased from 194 days in 2016 to 234 days in 2018 primarily due to increase inventory days from 235 days to 273 days which can be problematic for a lifestyle brand because it has to pick up on a global trend in the fashion industry quickly. Brands like Zara have mastered this concept and the time-gap between ideation to store-delivery is short.
Capital structure analysis from our Financial Ratio Analysis Help service providers
Interest Coverage ratio has been continuously decreasing from 42.02 in 2016 to 21.84 in 2018 because of the rise in debt level of the company which company has invested in opening new stores across geographies and also in the modernization of its IT services to make it more central in operations. Also, the EBIT growth rate of the company has been declining on a YoY basis resulting in lower Interest coverage ratio. This value is of particular importance to lenders because it signifies the borrower’s ability to pay its interest obligations (Capital Structure 2014).