Once the poster child for the British luxury goods industry, Mulberry (LSE: MUL) has lost its way over the past two years.
The group’s struggles can be traced to its decision to hike prices during 2013, in an attempt to move the brand upmarket. Unfortunately, by deciding to head upmarket, Mulberry alienated its core customers and sales started to fall.
And by mid-2014 Mulberry’s profits had collapsed by 50%, so management axed the ill-fated push upmarket.
However, the company is still suffering from a hangover of the push upmarket.
Sales have continued to decline, and, according to full-year 2015 results issued today, Mulberry’s adjusted pretax profit for the year to March 31 plummeted to £4.5m — a far cry from the pre-tax profit of £36m reported for 2012.
Signs of improvement
Mulberry’s group sales fell 9% for the year ended March 2015. The company reported an after-tax loss of £1.4m for the period.
Nevertheless, after last year’s mid-year strategy change, Mulberry’s sales are showing signs of life. Group retail sales during the second half of last year grew by 9% while sales for the ten weeks to 6 June were up 17%.
But while this sales growth is encouraging, Mulberry currently trades at an eye-watering forward valuation.
Premium valuation
City analysts expect Mulberry’s earnings per share to jump by 170% this year after last year’s terrible performance. EPS of are 5.68p are expected, which leaves the company trading at a forward P/E of 160.
What’s more, analysts have penciled in EPS growth of 118% for 2016. This still leaves the group trading at a 2016 P/E of 74.
These lofty valuations don’t leave much room for error if Mulberry fails to live up to City expectations.
Steady growth
Burberry (LSE: BRBY) has several key advantages over its smaller peer.
Firstly, the group has been able to drive steady growth for the past five years. Earnings have grown at a steady double-digit rate since 2011, and this is set to continue through to 2017.
Secondly, Burberry is achieving higher returns for shareholders than Mulberry.
For the 2014 financial year, Burberry reported gross and net profit margins of 71.2%, and 14.3% respectively. Mulberry’s gross and net margins came in at 68.2%, and 5.3% respectively for the same period.
Moreover, Burberry’s return on equity, the amount of net income returned as a percentage of shareholders equity, hit 27.5% last year. Mulberry’s ROE was a lowly 10.2%.
To an extent, Burberry’s high returns justify the company’s premium valuation. The group is currently trading at a forward P/E of 20.7, falling to 18.2 next year.
However, Mulberry’s lackluster returns do not support the company’s valuation.
Income play
Mulberry also leaves investor wanting when it comes to income. The company only supports a dividend yield of 0.2%, and the payout has remained unchanged since 2012.
Burberry on the other hand currently supports a dividend yield of 2.1%, and management have hiked the payout by 75% since 2011.
