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Stock Watch: TUI, Ted Baker & Superdry

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

As the likes of easyJet and On The Beach scrabble to pick up lucrative business in the aftermath of the collapse of Thomas Cook, its biggest competitor TUI (TUI) is in contemplative mood.

Acknowledging the advantages of having its biggest competitor fall, it is also painfully aware that Thomas Cook’s demise has not dampened the competitive nature of the industry or taken down with it the problems that caused the world’s oldest tour operator to fail.

As its chief executive has said - we have to ask ourselves what happened and why it happened. And why we do not want it to happen to us.

Since September, TUI has sought to take advantage of the weaker competition, announcing it will increase its airline capacity by 2 million seats next summer and adding 135 former Thomas Cook hotels to its books.

But times are decidedly tough for the travel industry. While demand for package holidays is surprisingly stable and potentially highly lucrative, the sheer glut of competition, mixed in with issues such as a weak pound and a slide in consumer spending, have made the going tough.

While they may very well be one very large competitor down in the travel sector, there are a lot of other factors still at play.

TUI hasn’t been immune to the pressures faced by the travel sector and has issued two profit warnings this year: one because of weakness of the pound and shifts in consumer demand, the other due to the grounding of the Boeing 737 Max jet, which it has said will cost it €300 million this year.

For the year to September 2018 revenues at TUI rose 5% to €1.5 billion and underlying earnings rose 4% to €1.15 billion. But, as weaker demand continues, this year earnings are expected to fall by about a quarter to roughly €870 million to €880 million, depending on currency fluctuations.

In October, analysts at Morgan Stanley downgraded TUI’s shares, saying that the benefit from Thomas Cook’s collapse would not be “immediately obvious” as it depended on competitors’ reactions and consumer confidence in package holidays. They added that the 737 Max groundings and Brexit would continue to weigh on earnings in 2020.

For its part, TUI has reiterated its underlying earnings guidance and said its summer season closed in line with expectations. It said it was assessing the short-term impact of Thomas Cook's insolvency, on the final week of its financial results for the 2019 financial year.

One line of business investors will be interested in is its push into the activities and experiences market, which is worth £150 billion a year. So far it has bought the online activity booking platform Musement, which it snapped up for a cool €35.5 million in 2018. TUI has already doubled the number of Musement’s employees to 260 and plans to expand the number of bolt-on holiday activities, with things like wine tastings, helicopter trips and hot air ballooning in the Moroccan desert.

Ahead of its full year results due to be posted on Wednesday, brokers seemed relatively cautious. Exane BNP Paribas has downgraded its investment rating to neutral from outperform. Morgan Stanley has also downgraded its investment rating on TUI to equal weight from overweight and cut its price target from £11.50 to £10.50. UBS remains neutral but has raised its price target to £10.20 from 900 pence.

Also on Wednesday we should get a trading update from Ted Baker (TED). It, like pretty much every other retailer, has been discounting heavily over the Black Friday period, so we’ll no doubt get an update on that. But what is likely to draw more attention is the news this week that it had overstated the value of its inventory by up to £25 million.

The clothing group has said it will launch an independent review into the issue, but was keen to stress that any adjustment would relate to previous years and would not affect its financial position this year. Its initial estimates are that it will lead to an adjustment of between £20 million and £25 million.

That certainly didn’t help the share price. Ted Baker’s shares fell as much as 12% before recovering a little, leaving it about 8% down on the day the error was made public. But that means its shares have fallen by four-fifths over the past year.

Liberum, the retailer’s broker, tried to down-play the overstatement of stock issue, calling it “less than ideal”, but in truth it’s another major setback for the company that is still reeling from allegations of inappropriate behaviour towards staff by Ted Baker founder Ray Kelvin and three profit warnings this year too.

Incidentally, the overstatement is also a setback for KPMG, the accounting firm that has audited Ted Baker since 2000 and which is already facing questions about restated historic inventory numbers at Halfords, another FTSE 250 retailer audited by the group.

Maybe Superdry’s (SDRY) half-year results on Thursday will be a little more cheerful. After all, founder Julian Dunkerton reckons he has “saved Christmas”.

He’s proclaimed he’s done enough to steer the clothing brand through the crucial Christmas shopping season after winning a boardroom fight to regain control of the company earlier this year.

Having issued three profit warnings this year too Superdry has had a tough time. Consensus forecasts suggest analysts are expecting revenue to fall slightly in the current year, but underlying profits are set to rebound by 24%.

RBC Capital Markets has repeated its sector performer investment rating on Superdry, but cut its price target to 490p from 560p. House broker Liberum Capital maintains its buy rating on the shares and has raised its price target from 500p to 600p.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Past performance is not a reliable indicator of future returns. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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