Investment Column: Ted Baker hasn't gone out of fashion yet

C&C Group; Carluccio's
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The Independent Online

Our view: Hold

Share price: 460.75p (+27.5p)

Ted Baker yesterday provided further evidence that its upmarket, and sometimes quirky, clothing is still in fashion with British shoppers.

The retailer, which also operates stores, concessions and licences in the Middle East, Asia and Europe, said an improved trading performance and growth in gross margins in the UK helped to offset a weak performance in overseas market – notably dire sales in the US.

Its total retail sales jumped by 15 per cent to £61.3m over the 28 weeks to 15 August, but the picture was much bleaker for its wholesale division. Ted Baker's wholesale revenue tumbled by 16.3 per cent to £15.3m, although about a third of this resulted from transferring wholesale accounts to concessions and ditching certain partners "no longer appropriate" for its brand, a trend it expects to continue in the second half. This shift from wholesale contributed to Ted Baker's first half pre-tax profits falling by 18.4 per cent to £6m. Its retail division's profits are weighted heavily towards the second half.

In fact, Numis Securities sees "considerable opportunity" for Ted Baker to grow its UK like-for-like sales in the second-half – as it starts to overlap the period following the collapse of Lehman Brothers. As a result, the analyst has raised its 2010 pre-tax profits forecast for the year to January 2010 by £1m to £18.7m, compared to an actual £19.6m last year. More good news came from Ted Baker maintaining its interim dividend at 5.25p.

However, there are reasons for investors to be cautious about the group. City analysts expressed concern that its wholesale division had not yet turned a corner after finding the going tough for about 18 months. The group's shares, which trade on a forward 2010 price earnings ratio of 14.3 times, are also at a premium to standard high street retailers, although this partly reflects its growth and international potential. For this reason, we believe that its shares are worth holding on to. Hold

C&C Group

Our view: Avoid

Share price: 300c (-11c)

C&C Group, the Irish-listed drinks business that makes Magners Cider, has had a rotten time of things, with its interim profits falling 9.9 per cent in the first half of the year.

The company, which operates mostly in the UK and Ireland, faces a number of sticky challenges: In Ireland, with GDP falling off a cliff, C&C has been forced to slash the price of its cider, while in the UK, the company is losing market share.

All this means that any punt is a very risky one indeed, and even chief executive John Dunsmore concedes that the investment case is built around a three-year plan where the aim is to expand internationally, especially in the United States, and to maintain market share in the UK. Mr Dunsmore says the recent acquisition of Tennent's will help steady the ship, allowing C&C to rely on beer sales.

Despite the bad news, some analysts do believe there is still some fizz left in C&C. The watchers at Davy point out that, "the EPS number was stronger than expected at 15.4c [and] the cash flow performance was very strong with free cash flow of €53.4m, representing 83 per cent of Ebitda. This compares to €47m last year. This was driven by a strong inflow of working capital and low capex spend. Net debt was €171m, down from €226m at the end of February".

While there are certainly scraps for investors to get their claws into, we think punters would be better off buying into something that is seeing the benefits of the recovery and where they will not have to wait three years to see the rewards.

C&C may eventually prove worth a gamble, especially if all the plans come off, but we are not persuaded it is worth backing yet. Avoid.


Our view: Hold

Share price: 96p (-0.5p)

Many Brits have cut down on eating out during the recession, but Carluccio's has continued to pull punters into its Italian restaurants, which also house its food shops.

Yesterday, the 45-store chain said it expected to deliver underlying pre-tax profits ahead of expectations. This was driven by an 8 per cent uplift in total sales and six new openings, including in Dubai.

Carluccio's said its store opening plans for 2010, which will be funded out of cash flow, remain unchanged. But it has not found the going as easy as making a pizza this year. Analysts at WH Ireland forecast it will deliver pre-tax profits of £4.7m in 2009, down from £5.6m the year before.

This year, it has been hit by the deprecation of the pound against the euro on imported cheeses, higher utility bills and increased employment regulation from the Government. Its shares, which trade on an 2009 price earnings ratio of 18.5 times, are not cheap but given its resilient performance, Carluccio's shares are a good one to have an investor menu. Hold.