Is Ted Baker's premium rating deserved?

Ted Baker has shrugged off the threat of warmer weather, the cause of numerous profits warnings across the retail sector, and reported a big surge in sales. And that's even before its peak trading period has begun. The market is clearly still wary, however, and the shares carry a premium rating, so is this a buying opportunity?

Group revenue was up by nearly 16% in the three months to 8 November, boosted by a near-13% rise in retail sales and 10% expansion to its retail space. Growth wasn't confined to its stores, either, with sales through its online business continuing to grow by over a third. But the main driver of revenue was its wholesale operation, up by nearly a quarter. For the full year, wholesale sales should be up 20%, better than previous forecasts for 18%.

"Both the UK and US saw growth driven by strong underlying performance, with the US wholesale business trading particularly well as the brand continues to gain traction," said the company. "Growth in the UK wholesale business was also driven by the continued success of our international licence partners, particularly in the Middle East."

Its international expansion seems to be going to plan, too, although gross margin is set to fall due to a change in sales mix. Analysts at Liberum reckon this could represent a fall of 100 basis points for the full-year.

Founder and chief executive Ray Kelvin warned that despite this year's positive growth, its full-year results are still heavily dependent on Christmas trading.

But Liberum is confident, increasing its forecasts for 2015 pre-tax profit by 1% to £47.4 million. At 2,078p, Ted Baker trades on 26 times 2015 earnings per share estimates, dropping to 23.6 for the year to January 2016. And Liberum reckons double-digit earnings growth justifies an enterprise value-to-operating profit multiple of 20 times, a premium to peers. That explains the target price of 2,400p.

"The shares jumped recently on the news TED will be included in the MSCI Index, but they are still down around 10% year-to-date and we believe a good buying opportunity remains," it said.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.