Ted Baker admits to £58m hole as stock count error doubles
Embattled fashion brand Ted Baker has more than doubled the initial estimates of a stock miscalculation, stating it has overestimated the numbers by at least £58m.
The designer clothing retailer appointed Deloitte to carry out an independent review after uncovering an accounting error of £25m in overstated stock in its end of year accounts to 31 January, 2019.
However, it has now confirmed a much larger problem than initially thought, resulting in a 25% inventory write-down.
It is the latest blow for the troubled company, which issued four profit warnings in 2019.
“Ironically, the inventory mountain at Ted Baker is referred to as a £58m hole,” said Ian Smith, finance director and general manager at automated accounts payable and document management software provider Invu. “I would suggest it is not such a surprise that they have an inventory management issue.”
The accounts have showed a deterioration, Smith said, in the finished goods stock turnover ratio since the year ending January 2016, resulting in £51m of extra inventory.
Finished goods inventory is the number of manufactured products in stock that are available for customers to buy. The finished goods inventory formula is used to calculate the value of such goods for sale.
According to the Ted Baker accounts, finished goods increased by £99m between January 2016 (£117m) and 2019 (£216m). Using the finished goods turnover ratio of cost of sales divided by finished goods for 2016, the finished goods inventory should have increased to £165m in 2019, due to the growth of the business, but the extra £51m suggests a major problem, Smith said.
“In the ‘all you can eat’ buffet of risk disclosures identified on pages 20 to 24, I see no mention of inventory obsolescence,” said Smith. “Surely this is a significant risk in the luxury clothing market, when so much finished goods inventory is held? There may of course be hidden somewhere in the 123 pages of the annual report a mention of the inventory issue, but who has the energy to read all the ballast that surrounds the facts?”
Another concern is the highly material overstatement was apparently not identified by either management or the auditors, added Gavin Pearson, partner and forensic accountant at Quantuma.
“Not only does it cast doubt over the systems and controls in place at Ted Baker - particularly following a previous stock theft issue some years ago - it also may give concerns over the company’s underlying business strategy, given that on the face of it, it is holding stock where its net realisable value is less than its cost, ie it appears to be selling stock for less than it purchased them,” he said.
Although the release does not refer to any other issues being immediately identified by the investigation, it may not be the end of the problems for the company or its investors, which have endured a brutal year said Pearson.
Last month the company appointed a specialist team to report to a sub-committee chaired by independent director Sharon Baylay, as it tries to repair its reputation following a damaging year of business and company culture failings.
Founder Ray Kelvin resigned in March 2019 following a series of allegations that he inappropriately “hugged” members of staff - which he denies. In December, Kelvin’s replacement also resigned along with the company executive chairman after the firm issued a fourth profit warning of the year.
“The High Street is currently a volatile place for retailers at present who are facing significant financial pressures,” said Stephen Young, partner at Keystone Law. “In that market, it is essential for directors and stakeholders of a business to know that their accounts represent a true and fair view of their financial position.”
Ted Baker’s misrepresentation of stock will have meant that the business’ profitability would have been overstated, and affect the value of its share price on the London Stock Exchange.
“It’s not the first time an accounting error of this kind has been discovered in the retail sector, with businesses such as Superdry and Patisserie Valerie suffering similar issues in recent years,” said Young. “It is essential for both the board and stakeholders that the error which has been discovered is rectified quickly so the board can make fully informed decisions on the basis of accurate financial information”