Ted Baker Appoints Law Firm to Investigate Overstated Inventory

Bloomberg Commuters pass a Ted Baker Plc apparel shop in a concourse at London Bridge railway station in London, U.K.
(Bloomberg) —

Ted Baker Plc said outside lawyers and accountants will review an overstatement of unsold goods, deepening the woes of the U.K. fashion chain whose founder resigned this year after allegations of inappropriate workplace touching.

Inventory probably needs to be reduced by as much as 25 million pounds ($32 million), Ted Baker said Monday, without giving a reason. The shares fell as much as 15% to their lowest in a decade and are down about 90% since their 2015 peak.

The board hired Freshfields Bruckhaus Deringer LLP and will appoint independent accountants to study the matter. They will report to a subcommittee headed by Sharon Baylay, an independent director.

The company’s problem have multiplied in the past year amid three profit warnings and an investigation into founder Ray Kelvin’s behavior. He resigned in March after allegations he gave employees unwanted hugs and asked female staff to sit on his knee. In February, the company warned of a hit to earnings, partly due to an inventory writedown of about 5 million pounds.

The latest news is “less than ideal,” wrote Liberum analysts including Adam Tomlinson. “It is indicative to some degree of the very early-stage work that the new and highly regarded CFO, Rachel Osborne, is undertaking.”

No Cash Impact
Ted Baker said it expects any future adjustment to inventory will have no cash impact and will relate to prior years. Costs associated with the independent review will be expensed in the period incurred, it said.

“The key point is understanding how it occurred, why it wasn’t discovered until now and whether the control environment is robust enough to flag such problems in the future,” said John Stevenson, an analyst at Peel Hunt.

By overstating inventory, a company could boost net income because it lowers the cost of goods sold. However, the process becomes difficult to unwind, because it raises the costs in future periods.

The company hired Osborne, the former chief financial officer of Debenhams Plc, in September.

The stock traded down 8.7% as of 11:27 a.m. in London. Ted Baker is scheduled to give a trading update Dec. 11. The company warned in October that second-half earnings may fall amid price competition and a shift to online shopping.

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