The bad news this morning for holders of retailer Ted Baker (TED) is that the company has announced an independent review of its inventory. It says it has identified that the value of inventory held on its balance sheet has been overstated. It estimates that the figure is up to £25 million and that it relates to prior years. This looks like yet another audit failure (the auditors are KPMG).
The share price is down 10% today at the time of writing but it’s been falling for a long time so it’s now down well over 80% from its peak at the start of the year. Warnings about its stock holding are not new. This is what the Investors Chronicle had to say in October: “Ted Baker’s stock levels have been a cause for concern. Inventories have grown consistently in recent years, reaching a peak of 37 per cent of revenues at the full year”. For a clothing retailer to hold that much stock seems simply unreasonable. That report came after an unexpected half year loss. I suspect that even worse news may come out in due course.
On Friday an article by Simon Thompson in Investors Chronicle contained a puff for SRT Marine Systems (SRT). This made for interesting reading as I used to hold the stock – sold at 25p in 2012, price now 52p. I sold because of repeated lack of progress and overoptimistic forecasts of big deals in the pipeline. The CEO (he’s still there) seemed to be a perennial optimist and even analysts started to become wary. Revenue and profits jumped around from year to year (big profits in 2019 after losses in 2018) and the share price jumped around similarly. Simply not the kind of company I like to hold.
Has anything changed to cause Simon to tip the share? The basis is a big deal (a “game changing contract worth £31.8 million”) to sell AIS systems for marine surveillance in the Philippines. There are also other similar deals in the pipeline. This is what it says in the recently published Interim Report in which they also reported a major loss: “Most of our system discussions are confidential in nature and usually have a long gestation period due to the nature of a government turning a general idea into a real system with all the necessary regulations, budgets and approvals. Over the last few years, we have followed a very steep learning curve in respect of understanding the realities of the intricacies and complexities of the processes that each of these large contracts must complete prior to SRT being contracted. Whilst predicting timescales remains imperfect, this knowledge now enables us to more accurately characterise system opportunities with regards to their status within a customer’s process and better understand the real time window within which we would expect to be contracted and start implementing an SRT-MDA system. We hope this will reflect in an improving ability to provide market updates on the status of future system contract opportunities”.
Big projects also create big risks though, and soak up working capital. Will they be completed on time and within budget? Will the customers be satisfied and pay on time? I won’t be jumping in to follow Simon Thompson’s tip just yet. I’ll wait to see if the leopard can change its spots.
The author does not hold shares in any of the companies mentioned in this article.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )