Gamble of the week: This fashion retailer isn’t cheap – but it is worth it

Founded back in 1987, selling shirts in Glasgow, this fashion stock has proven itself to be a very good business. To say it is a gamble might imply that it is a risky business. But it isn’t really, or at least no more than most international retailers.

What has made it a bit risky for investors is that its share price has been a bit frothy – paying too much for a share can often be a very good way to lose money. It’s also quite an illiquid share which means its price can move quite sharply, even when very few shares are traded.

The shares were changing hands for nearly £24 at the beginning of March, but they’re now just over £17. They are still highly rated – at just over 20 times this year’s forecast earnings – but the company’s potential to keep profits growing means the shares have become interesting once again.

Ted Baker (LSE: TED) wants to become a prominent lifestyle fashion brand. But unlike other companies trying to do the same thing, Ted Baker is doing something different. It’s not selling expensive handbags but is focusing on selling good quality stuff at a fair price, or “affordable luxury” as it is known. And, so far, it’s been very successful at doing this.

Not only that, but Ted Baker has, so far, been good at mining different ways of selling its products. It has high street stores and concessions in department stores and an internet business.

Ted Baker share price chartIt also wholesales its clothes, watches, eyewear and fragrances to other sellers as well as licensing its brands. It is not reliant on any particular product line either. And although it’s often perceived as mainly a fashion business for men, over half its sales come from womenswear.

The company has been very good at not expanding its business too quickly, or into the wrong countries. This is shown by the fact that it has been able to grow its sales at a faster rate than the increase in selling space – a sure sign of a very good retailer.

Profitability is very good too, and the return on shareholders’ equity was a very impressive 25.7% last year. Current trading continues to be very strong, with very strong sales growth showing across all its selling channels.

Analysts are forecasting that earnings per share will increase by nearly a quarter this year and by a double-digit percentage in 2016. When it comes to shopping and buying shares, most of us will admit that we like a bargain. Sometimes though, it’s worth paying up for a quality business and then hanging on to it.

Verdict: buy

Merryn

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