The struggling fashion retailer Ted Baker has admitted that an accounting error was twice as big as initially thought, leaving it with a £58m hole in its balance sheet.
Ted Baker appointed accountants from Deloitte last month to investigate after the company found that it had overestimated the value of its stock.
The retailer’s preliminary investigations suggested it had overestimated the value of the stock it held at 26 January 2019 by between £20m and £25m but that figure has now more than doubled. Shares in Ted Baker fell nearly 10% to 288p on the news.
The results of the accounting investigation come after Ted Baker’s banks appointed advisers to carry out a business review amid concerns that its weak financial position could force it to look for a cash injection. A £58m overstatement would be larger than the London Stock Exchange-listed company’s annual profits before tax for the year to 31 January 2019 of £50.9m.
The overstated assets were a non-cash item related to previous years and Ted Baker did not update its profits guidance for the 2019-2020 financial year on Wednesday.
John Stevenson, an analyst at Peel Hunt, a stockbroker, said that “concern is focused on the reason for the error”, with no suggestion that current stocks are overvalued. The £58m overvaluation implied that the value of clothes, shoes and other items was overvalued by 35%, Stevenson said.
Ted Baker was audited by Big Four accountants KPMG during the period in question. KPMG previously received a reprimand and a £3m fine for a conflict of interest over its work with the retailer.
The blunder is the latest in a long line of problems to hit Ted Baker. Its founder and former chief executive, Ray Kelvin, resigned in March after allegations of “forced hugs” at the company. Kelvin has denied allegations of misconduct.
The company’s shares had already lost more than three-quarters of their value since the start of 2019 and about 90% of their value since hitting their all-time high in November 2015. The share price fall has also wiped millions of pounds off the personal wealth of Kelvin, who still owns 35% of the company.
The retailer is also struggling with sales and profitability. Ted Baker issued four profit warnings in 2019 and slumped to a first-half loss of £23m in October, it’s first in more than two decades.
The last profit warning prompted the departure of the retailer’s leadership, with chief executive Lindsay Page and executive chairman David Bernstein both leaving in December.
Page was replaced in the interim by finance director Rachel Osborne, who moved to Ted Baker from Debenhams in September. Sharon Baylay became acting chair of the board.
The new leadership’s bulging in-tray also includes an ongoing investigation by London law firm Freshfields Bruckhaus Deringer into the reasons for the balance sheet misstatement, a review of the company’s costs by Alix Partners, and the business review being carried out by FTI Consulting at the request of Ted Baker’s banks.
The troubles have also attracted the attentions of hedge funds. Three funds have declared short bets that shares will fall, while Toscafund, an investor known for its sometimes aggressive activist stance, bought 12% of Ted Baker’s shares in December, making it the second largest shareholder after Kelvin.
Before Christmas, Ted Baker said it had reduced its expectations for profit before tax for the year ending 25 January 2020 to only £5m.
Last month Ted Baker said that trading over November and the Black Friday period was below expectations and that it anticipated “difficult trading conditions will continue”.
Sourced from the Guardian - written by Jasper Jolly