2014 has been a very tough year for shareholders in Mulberry (LSE: MUL) (NASDAQ: MLBGF.US), with the high-end fashion retailer seeing its share price fall by 25%. Indeed, recent news has shown why, with like-for-like sales being down 15% and pre-tax profits falling by 45% in the financial year to the end of March.
A key reason for such stark falls has been the company’s decision to move up the price point ladder and seek to compete with traditionally higher end brands such as Burberry (LSE: BRBY) (NASDAQOTH: BURBY.US). This strategy has backfired, with Mulberry reporting that it will now seek to introduce lower priced products in an attempt to win over lost customers who have clearly been unwilling to pay the new, higher prices for iconic handbags and other designer products.
Why This Is Good News For Burberry
Although disappointing for shareholders in Mulberry, the failure of the company to occupy a higher price point could be great news for Burberry. That’s because it shows that competing with Burberry is very difficult — even though Mulberry has a strong brand and a significant amount of customer loyalty, it was unable to make a dent in Burberry’s sales. This shows that the threat of new entrants is relatively low for Burberry, which means profits are likely to be higher in the long run as it benefits from low levels of competition from new entrants.
Furthermore, the failure of Mulberry to sell its products at higher prices demonstrates just how strong and lucrative the Burberry brand is. Of course, when valuing a company such as Mulberry or Burberry that has little in the form of tangible assets, its brand and goodwill form a significant proportion of its overall value. With Burberry’s price point being high and under less threat from competition than previously thought, it could justify a higher share price for Burberry in future.
Looking Ahead
Of course, Burberry continues to offer above-average growth prospects. The company is forecast to increase earnings per share by 3% in the current year and by 10% next year, which is relatively impressive given the uncertainty that surrounds one of its key markets: China. Indeed, with a diverse regional exposure and a seemingly ever-strengthening brand, Burberry could be a stock to watch over the next couple of years, while Mulberry could be forced to permanently return to its former, and lower, place on the price point ladder.
