Sales at fashion retailer Ted Baker (LSE: TED) rose by 24% between February and June, according to the firm’s latest update. The firm said that full-year performance was expected to be in-line with expectations, nudging the firm’s share price 2% higher.
Much of Ted Baker’s recent growth seems to be driven by overseas expansion. During the period, the company opened additional stores or concessions in Hong Kong, Germany, France, the Netherlands, North America, China and Japan.
Online growth is also strong, with internet sales rising by 46.9% during the period.
Shares in Ted Baker have risen by 49% over the last year, outperforming two of its best-known UK peers, NEXT (LSE: NXT), up 15%, and ASOS (LSE: ASC), up 23%.
Can Ted continue to outperform, or is it time to look for an alternative?
Fat profit margins?
Two important measures of profitability for retailers are gross margin and operating margin. Here’s how our three firms compare:
|
Profitability |
Ted Baker |
Next |
ASOS |
|
Gross margin |
60.7% |
33.6% |
48.6% |
|
Operating margin |
12.8% |
20.3% |
4.3% |
Ted Baker and Next both look good, in my view. Next’s 20% operating margin is seriously impressive, while Ted Baker’s gross margin of 60.7% shows that the firm has its manufacturing costs firmly under control.
The weakest performer appears to be ASOS. An operating margin of 4.3% is very low in this sector — online peer Boohoo.com has an operating margin of nearly 8%, for example.
My other concern with ASOS is that its margins are falling. The figures I’ve used above represent the firm’s trailing twelve month margins. During the first half of the current year, ASOS’s operating margin fell to just 3.3%. This suggests to me that ASOS is having to cut prices to boost sales.
Are earnings growing?
None of these companies are cheap stocks, so investors will expect a decent level of growth. However, the latest consensus forecasts suggest big differences between each firm:
|
Earnings per share growth |
Ted Baker |
Next |
ASOS |
|
2016 forecast |
14.5% |
6.4% |
25.4% |
|
5-year historic average |
14.7% |
13.7% |
10.3% |
Ted Baker has delivered very consistent growth over the last five years, and City analysts expect more of the same in 2015 and 2016.
Next has also been a strong grower, and while its growth may be slowing slightly, its higher yield and history of special dividends provide some compensation for shareholders.
The weakest performer seems to be ASOS. Although growth is expected to rise sharply over the next year, the firm’s earnings growth over the last five years has been relatively modest.
In part, this is due to the investment needed to build up the firm’s scale. But given ASOS’s high price tag, I think this needs watching.
Is the price right?
None of these stocks are especially cheap, as these figures show:
|
Valuation |
Ted Baker |
Next |
ASOS |
|
Trailing P/E |
34 |
18 |
110 |
|
Current year forecast P/E |
29 |
17 |
90 |
Ted Baker’s valuation looks demanding but not unreasonable, given the firm’s steady growth and track record of delivery.
Similarly, Next’s P/E looks fair, given its strong cash generation and prospective yield of 4.0%.
ASOS looks the most likely to disappoint, in my view. Earnings growth has fallen short over the last year or two, and the firm could disappoint investors again. Doing so might trigger a sharp revision of its valuation, especially if profit margins continue to slip.
I’d buy this retailer
My pick of these three firms would be Ted Baker, followed by Next. Both look likely to continue to deliver steady growth, enjoy stable profit margins.
