TED BAKER’S ANNUAL REPORT ANALYSIS

  1. Introduction of Ted Baker

Ted Baker is British luxury retail clothing in the UK. It offers clothing for men, women and children (Ted Baker plc – AnnualReports.com. 2016). It generates revenue from the UK, the rest of Europe, US, Middle east, Canada, Asia, South Africa, Australia and China. They aim becoming a leading global lifestyle brand through expansion of its collections, controlled distribution and carefully managed overseas development. They emphasis on design, product quality and attention to detail, t has a team-oriented structure which, with passion, skill and commitment ensure its success (Ted Baker plc – AnnualReports.com. 2016).

 

  1. Find 3 pieces of information in Ted Baker Annual Report that would be of interest to shareholders, prospective shareholders, employees, suppliers, customer and government. Why each user group would be interested in each piece of information you chose? (Mark= 20%)

The first piece of information is the Chairman’s statement that indicates that the company has delivered a strong performance across all channels which resulted in 20.4% rise in its revenue (Ted Baker annual report, pg. 4). This implies more bonuses for employees, favourable returns on their investment for shareholders and prospective shareholders, for suppliers it implies their dues will be paid, more tax collection revenues for government and continual provision of goods without interruption for customers. The second news is about local and international expansion, Ted Baker opened a new store in the UK, Marseille and Paris, France (Ted Baker annual report, pg. 11). This implies more job opportunities for employees, maximization of shareholder value for shareholders and prospective shareholders, more market for suppliers, more tax collection revenues for government and more product outlets for customers. The third news is the net decrease in cash and cash equivalents of £10.1m which was used for further capital expenditure to support their long term development (Ted Baker annual report, pg. 11). This also implies more job opportunities for employees, maximization of shareholder value for shareholders and prospective shareholders, more market for suppliers, more tax collection revenues for government and more product outlets for customers.

 

  1. Which regulations does Ted Baker need to follow? Provide an example of how the regulations are incorporated in the annual report. (Mark= 20%)

Ted Bakers uses International Financial Reporting Standards which are incorporated in the preparation of the consolidated and parent financial statements. They provide the conceptual framework that forms the theoretical basis for determining the measurement of the transactions. Also, the requirements of the UK Companies Act 2006 are used by Ted Bakers in preparing the consolidated general purpose financial report. The UK Companies Act 2006 spells of the company directors’ duties which were codified for the first time. They include an obligation to promote the company’s success, to consider interests of employees, the community as well as the environment, and to be fair to shareholders. This is incorporated in the annual report under the section, Director’s Report: Governance where they state that at Ted Baker they believe in being open and honest in the way and they operate in a manner that is fair and sustainable (Ted Baker plc – AnnualReports.com. 2016).

 

  1. Explain how the following accounting concepts will have influenced the accounting policy for Property, Plant and Equipment. (Mark= 20%)
  2. a) Historical cost: It ensures that the value of Property, Plant and Equipment is reported on its original costs; however due to depreciation, PPE will not be reported at its current market value (Collier, 2009).
  3. b) Matching principle: It ensures that the expenses, depreciation expense for PPE is recorded during the period that it is incurred irrespective of cash transfer (Arnold, 2013).
  4. c) Going concern: Is an assumption that a business will continue in business for the foreseeable future. It will ensure that PPE is depreciated over its useful life (Brigham & Ehrhardt. (2013).
  5. d) Prudence: It will ensure that the revenues generated by the PPE are recorded only when realized and the liabilities are recorded as soon as they occur (Arnold, 2013).
  6. e) Consistency: It will ensure that once accounting method, such as depreciation method, is adopted, it will be followed consistently in the future accounting periods even it result in inaccurate financial results (Collier, 2009).

 

  1. Using the financial statements calculate suitable ratios to enable you to make an assessment of the profitability, efficiency and performance of Ted Baker. Interpret your findings, giving a possible reason for any observed changes in each ratio. You should include: (Mark= 30%)

 

  1. a) Five years analysis of Basic Earnings per share, dividends per share and dividend cover (the ratios are given in the Annual Report)
  2012 2013 2014 2015 2016
EPS 42.20p 51.50p 67.20p 82.00p 100.60p
DPS 28.60p 24.15p 28.20p 35.50p 42.20p
Dividend cover 1.71 2.34 2.45 2.34 2.38

Source: Londonstockexchange.com. (2016).

EPS increased consistently across the period implying an increase in the Ted baker’s profitability, an increase in amount of profit distributed to each share outstanding (Collier, 2009). Dividend cover also increased implying an increased in the ability of Ted to pay dividends out of profits to its shareholders.  Finally, DPS despite the fluctuation, increased across the period indicating an increase in Ted’s ability to pay dividends out of its profits attributable to shareholders.

 

  1. b) Calculate and analyze the profitability ratios: Return in Capital Employed, Operating Profit margin and Gross Profit Margin for 2015 and 2016.
  2015 2016
Return in Capital Employed 49.76/140.57 = 35.40% 59.37/231.16 = 25.68%
Operating Profit margin 49.76/387.56 = 12.84% 59.37/456.17 = 13.01%
Gross Profit Margin 235/387.56 = 60.64% 273/456.17 = 59.85%

Source: Londonstockexchange.com. (2016).

Ted Baker’s ROOCE decreased across the period hence a decrease in its efficiency in the use of invested capital. Ted Baker’s operating margin increased to 13.01% meaning an increase in efficiency of its operations which in turn implies higher profitability. Although gross margin decreased, it is approximately 60% implying Ted Baker is selling its inventories at higher profit percentage (Arnold, 2013).

  1. c) Calculate and analyze the Liquidity ratios: Current test and Acid Test for 2015 and 2016.
  2015 2016
Current test 159.59/91.09 = 1.75 191.33/109.19 = 1.75
Acid Test 159.59-111.11/91.09 = 0.53 191.33-125.32/109.19 =0.60

Source: Londonstockexchange.com. (2016).

Current ratio remained stable at 1.75 implying Ted is able to meet its short term obligations. Acid test ratio increased by 0.07, the ability of Ted Baker to meet short term obligations using liquid assets increased (Arnold, 2013). A substantial portion of Ted Baker’s current assets are in inventories. However, it is relatively liquid.

  1. d) Calculate and analyze the Gearing ratios: Debt/ Equity and Interest Cover for 2015 and 2016.
  2015 2016
Debt/ Equity 91.09/140.57 = 0.65 167.75/172.60 =0.97
Interest Cover 35.85/1.18 = 30.38 44.24/1.43 = 30.94

 

Ted Baker’s debt to equity ratio increased massively to 0.97, implying it uses more debts than equity hence it is riskier. However, it has an increasing interest cover of more than 30 times, it is able to meet its finance costs and hence not likely to go bankrupt.

 

  1. Conclusion

In conclusion, Ted Baker is a good investment opportunity as it has solid financial performance. It is more profitable, more liquid and favorable interest cover and can meet its finance costs and hence not likely to go bankrupt. It is well-positioned to offer high financial rewards, it opportunity to obtain high revenues to offer to investors. It has an opportunity for future economic growth due to its expansion of its collections, controlled distribution and carefully managed overseas development

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