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Ted Baker £25m inventory error ‘only a hiccup’

Ted Baker’s inventory blunder is “very serious” but unlikely to have a long-term negative impact on the business, industry commentators have said. 

The brand this week announced that it has appointed law firm Freshfields Bruckhaus Deringer to probe into an overstatement of the value of its stock, which wipe up to £25m off its balance sheet. It said the accounting error would have “no cash impact”, and relates to previous years.

The law firm’s independent accountants will report to a subcommittee chaired by Sharon Baylay, who joined the Ted Baker board as independent director last year. 

“Ted Baker is committed to ensuring the independent review is completed in an efficient and transparent manner and will update the market as appropriate,” the company said, adding that it would not comment further while the investigation is ongoing.   

Drapers understands that Ted Baker is expected to say more in its next trading update on 11 December.

Observers pointed out that the timing of the overstatement is unfortunate, given Ted Baker has been struggling with weak trading.

The brand swung to a loss before tax of £23m for the 28 weeks to 10 August 2019, from a profit of £24.5m during the same period in 2018, in what it described as a “challenging half-year”. 

“It’s fair to say [the stock overstatement] could not have come at a worse time,” said one retail financial restructuring expert. “The business is in the middle of trying to make itself more accessible and recover its former glory. 

“They’re going to get a forensic accountant in, and this tells you it’s a very serious issue. Ted probably knows that, irrespective of this error, it faces a very tough challenge. This is at best a distraction from that challenge and at worse something that compounds it.”

However, others dismissed it as an understandable error, which would not do any lasting damage. 

The managing director of one premium retailer argued: “It can be easily rectified, and an adaption will be made to historic accounts.

“Often a situation like this is about ‘old stock’ and what the stock’s true value is. Depending on your brand status and channel strategy you may, for example, be able to sell one-year-old product at 70% of its original price, or only 20%. The difference to 100% gets written off and comes straight off your profits – hence the City’s concern.”

He added: “However, there is no science and yes it can be easily done. I suspect a year or so ago Ted’s old product was felt to command higher value in a better market. Now it has been decided that is not the case.”

Peel Hunt retail analyst John Stevenson agreed: “There are two things that can happen in a situation like this. One is stock units that are overstated and the second is that the value of that stock is overstated. It can happen in retail because you don’t always have that level of visibility.

“Retailers tend to work on a last-in-first-out basis, so you work out the figures based on the average value of your stock.”

Another retail financial expert said: “This is not something you see frequently, but it appears to be only be a historic hiccup. I can’t see that it will make a big difference.”

 

 

 

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