Investing in penny stocks brings major risks and they can experience higher volatility than other shares. However, these stock market minnows can also offer significant growth potential.
At £1.20 today, the share price of one AIM-listed stock on my watchlist is quickly sinking towards penny stock levels. Just a year ago, it traded for £2.45 and back in 2012 the shares were changing hands for nearly £24 each. That’s a cataclysmic 95% fall from the stock’s all-time high to today.
The company I’m talking about is luxury leather goods and handbags producer Mulberry Group (LSE:MUL), which currently has a market cap of just £72.3m. So, is this iconic British fashion brand worth considering today at a 52-week low?
Here’s my take.
Share price slump
The Mulberry share price has suffered amid a wider downturn for the luxury goods sector that has affected other high-end retailers like Burberry Group.
The UK government’s 2021 decision to scrap VAT-free shopping for international visitors has acted as a key headwind. Furthermore, Mulberry’s difficulties have been compounded by China’s struggling economy. The country’s shoppers are hugely important in supporting demand for luxury brands.
As a result of these factors, the group’s latest trading statement for the crucial Christmas period was disappointing. In the final quarter of 2023, revenue fell a significant 8.4% compared to the previous year.
Despite the challenges, Mulberry resisted the temptation to offer discounts on its products. Gross margins remained in line with those reported in the first half of the year, which was encouraging to see.
However, against a backdrop of what the board describes as an “unusually high promotional environment” in the wider sector, I’m worried Mulberry’s current full-price strategy might be unsustainable.
Ultimately, the group may not be able to preserve its margins if it’s forced to resort to price cuts in a battle to retain market share.
Destined to drop below £1?
Mulberry isn’t a penny share just yet, but it’s not far off. But with a price-to-earnings (P/E) ratio of 21, the stock isn’t as cheap as investors might expect after the huge share price fall. Given the challenging climate, further declines can’t be ruled out.
Moreover, boardroom turbulence doesn’t point to a happy ship at present. This is unlikely to do much good for investor confidence.
Mike Ashley’s FTSE 100-listed Frasers Group controls a 37% stake in the company. However, management blocked the retail magnate’s attempt to join Mulberry’s board last year. The group’s still ultimately controlled by Malaysian billionaire Ong Beng Seng, who owns a 56% stake.
Optimists might point to Chancellor Jeremy Hunt’s pledge to review the decision to axe duty-free shopping for tourists. A reversal in the government’s tax policy would certainly be a welcome development for Mulberry shares, but this isn’t guaranteed.
Should I buy?
Overall, if Mulberry fails to reverse the decline soon, its share price could sink below £1. That would confirm a fall into penny stock territory.
Although some investors may be tempted to buy at those price levels, the risks facing the retailer look too great to me at present.
A more attractive UK tax regime could lead me to change my conclusion, but I’m avoiding this stock for now.
