Julia Irvine 2 Dec 2019 02:13pm

Ted Baker launches review into overstatement of inventory

Fashion retail chain Ted Baker has launched a review after discovering that the value of inventory held on its balance sheet has been overstated by an estimated £20m to £25m

It has called in law firm Freshfields Bruckhaus Deringer and is in the process of commissioning a firm of accountants to investigate what has been going on.

In a statement to the Stock Exchange, the company said that “the board believes that any adjustment to inventory value will have no cash impact and will relate to prior years”. It added that the review would be completed in “an efficient and transparent manner” and the market would be kept informed as appropriate. Beyond that, it would not be commenting.

KPMG, Ted Baker’s auditors for the past 15 years, declined to comment. However, the value of inventory was one of the risks the firm highlighted in its auditor’s report on the 2018 financial statements.

The Big Four firm explained that the valuation was a risk because it was subjective. “Inventory is carried in the financial statements at the lower of cost and net realisable value. Sales in the fashion industry can be extremely volatile with consumer demand changing significantly based on current trends. As a result, there is a risk that the carrying value of inventory exceeds its net realisable value.”

The inventory had been valued at £225.8m which was substantially higher than the figure of £187.2m in 2018. KPMG goes on to explain that the procedures it followed were designed to challenge the adequacy of Ted Baker’s provisions against inventory by seasonal collection.

These included testing on a sample basis the design and operation of controls related to inventory stock counts and purchases, and the appropriateness of the classification of items on the stock ageing listing by season.

The auditors also evaluated the current year provision by assessing historical trends, including the group’s historical trading patterns of inventory sold at full price and inventory sold below full price through alternative clearance routes, together with the related margins achieved for each channel.

KPMG added that it had used its business understanding, based on its knowledge of Ted Baker and its market, to assess “the appropriateness of the provision percentages applied by challenging the assumptions made by the directors on the extent to which older season inventory can be sold through various channels”.

After considering the evidence it had gathered, the firm decided that the level of provisioning was acceptable.

Like many other retail chains, Ted Baker has been in the doldrums recently: not only was it forced to issue profit warnings ahead of the publication of its 2018 financial statements, but it lost its founder and chief executive, Ray Kelvin, in March after allegations of misconduct, including “forced hugging”.

In August, its CFO of 17 years, Charles Anderson, resigned to join Mulberry and was replaced by former Debenhams CFO Rachel Osborne at the beginning of November.

She arrived shortly after the group announced a pre-tax loss of £23m in the first six months of the financial year, following a 2.9% fall in in-store sales and a 1.3% fall in online sales.

The value of the group’s shares have plummeted from 1,876p to 360p (down 83%) since the beginning of the year.

KPMG earned £445,000 from Ted Baker’s audit and other assurance services in 2018.