Moss Bros yields 8.9% after crash

When sizing up opportunities in the under-pressure retail sector, Moss Bros and Ted Baker have been two names high on many people's list of 'buy' options.

Moss is a well-run, cash-generative business with a strong dividend record, while Ted Baker has consistently demonstrated its growth credentials.

Today's trading updates from the pair reinforced the City's favourable view of Ted Baker, but cast doubt on what lies in store for Moss Bros after the suit retailer became the latest chain to warn on profits.

The downgrade wasn't massive, with full-year pre-tax profit likely to be in the range of £6.5 million and £6.8 million rather than the £7.2 million forecast in the City. This was caused by a dismal December performance, when like-for-like sales dived 8% and offset positive sales growth of 1.2% for August to November.

Moss shares slumped by over 20% to their lowest level in four years, despite long-time CEO Brian Brick's insistence that the company remains well placed with a niche position on the high street.

His view was supported by Cantor Fitzgerald retail analyst Mark Photiades, who maintained his 'buy' recommendation and 130p target price today.

He said: "We had always flagged that FY18 was going to be a year of two halves.

"Having seen H1 PBT rise by 16%, the trading performance in recent weeks is clearly a disappointment and worse than expected. This short-term performance does not, in our opinion, alter the medium growth potential of the business."

One of the big attractions for Moss investors has been the company's strong balance sheet, which has facilitated chunky dividend growth in recent years. Prior to this warning, its projected 7% dividend yield had prompted Peel Hunt to place Moss on its list of top income stocks for 2018, with a price target of 140p.

"While not quite covered by earnings (0.9x cover), this accelerated dividend has been growing at c5% pa since introduction four years ago, over which time the cover has improved from 0.6x to 0.9x," wrote the broker. "We expect ongoing dividend growth of c5% pa."

Moss pledged in its annual results in March to continue its progressive dividend policy, balanced against the wider investment needs of the business. The question for investors today will be whether the profits warning will shift this balance towards protecting the company's market position.

Assuming Moss holds the annual dividend in the current financial year, widely expected to be around 6.5p, the prospective yield based on today's four-year low share price, is 8.9%.

Brick said today: "We see the weaker environment as an opportunity to strengthen our core brand proposition and to utilise our strong balance sheet credentials to invest."

In contrast, Ted Baker continues to defy the retail doom-mongers as it reported a 9% rise in sales for the eight weeks to January 6, driven by strong online trading.

Margins were in line with expectations and CEO Ray Kelvin said the business remains well placed to continue its long-term development.

Shares jumped 9% to 3,060p, which is close to the record high of 3,555p set in November 2015 after a rally of 31% since the summer. Liberum raised its price target to 3,300p today, while Cantor's Photiades maintained his 'buy' recommandation and target of 3,100p.

On current forecasts, Ted Baker trades on a 2018 price/earnings (PE) multiple of 20.3x, which Photiades thinks is good value given the global growth opportunities.

He added: "Ted Baker is an iconic British brand gaining increasing traction with an international audience.

"A strong operational and financial track record has been established over the years and a well-invested and scalable platform has been created."

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.