Luxury handbag maker Mulberry a ‘hold’ despite near 50% drop in profits

12th June 2014

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Brokers are calling Mulberry a ‘hold’ despite the fashion house reporting a near halving of profits as the cost of store openings and investment in a new factory took their toll.

The group, famous for its luxury leather handbags, announced that in the 12 months to the end of March it amassed total sales of £163.5m, down from 2013’s figure of £165.1m, as a slowdown in emerging markets put the brakes on shoppers.

However profit before tax came in at £14m, down from £26m in the previous 12 months, which it said reflected the increase in costs, at £4.8m, associated with new stores opened this year and last year as well as £3.4m of exceptional, non-recurring costs.

Despite the announcement the stock has held firm and by 11:40am, the shares were trading at 709.5p, marking a 1.5p rise. Over the past six months however Mulberry shares have plummeted by 29% but the analyst consensus is presently pointing to a ‘hold’.

Going forward the business said it will launch lower-priced goods given that its plans to move more upmarket flopped.

Helal Miah, investment research analyst at broker The Share Centre, said: “This morning, Mulberry reported struggling sales as international growth was impacted by a slowdown in Asia, leaving the company still heavily reliant on the UK and Europe.

“The company’s strategy to take the brand more upmarket has failed, however investors will be pleased to see the new management acknowledge this. Mulberry will be introducing a more affordable range of products and focus on improving the productivity of existing stores.”

Commenting on the market update, executive chairman Godfrey Davis asserted that the firm is taking steps to restore the business to growth by creating “desirable new product across the entire Mulberry range whilst continuing to invest for the longer term”.

He added: “We have listened to our customers and are introducing attractive new products in the key £500-800 price range. As a first step we introduced the new Tessie collection two weeks ago which is proving popular. We are proud of having created 320 new manufacturing jobs by opening our second factory in Somerset during June 2013.

“With everyone now in place, we have doubled our UK production capacity and more than 50% of our handbags are now made in the UK using traditional skills and craftsmanship. While the business faces a challenging year, I am confident that we can build on Mulberry’s solid foundations and unique brand positioning in the luxury market to restore growth in the medium term.”

Miah is however cautiously optimistic and believes the firm’s change in strategy could see Mulberry appeal to the contrarian investor‏.

He said: “This change in strategy may finally begin to see a turnaround in Mulberry’s fortunes. Investment into the supply chain to build a more scalable business and the new factory in place, which has expanded UK production capacity by 50%, should fit better with a lower price, higher volume business. We continue to recommend Mulberry as a ‘hold’ for now, however the more adventurous contrarian investors may want to dip their toes.”

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