Is Mulberry Group PLC Blowing Its Rivals Out Of The Water?

MulberryInvestors in high-end fashion brand Mulberry (LSE: MUL) have endured a torrid year, with shares in the company falling by 24% as its eagerly anticipated change in strategy has, quite simply, failed. Indeed, Mulberry’s attempts to lift its brand to the same price point as Burberry (LSE: BRBY) has alienated many of its core customers and caused the company to deliver yet another profit warning just a few months ago.

However, with a new management team and a new strategy of reconnecting with core customers (in other words, cutting prices), could Mulberry be a better investment than its general retail peers going forward?

A Challenging Outlook

Certainly, Mulberry’s short-term future looks challenging. It is forecast to post an earnings decline of 46% in the current financial year, which comes after two other disastrous years where it saw the bottom line fall by 27% and 38%. As a result, Mulberry’s earnings per share (EPS) for the current year are forecast to be less than one quarter of their 2012 level.

The question, though, is whether Mulberry can recover its core customers. The market thinks it can and is assuming growth rebounds by 45% next year. However, the current share price suggests that much of that growth is already priced in, with the price to earnings (P/E) ratio being a sky-high 72. Therefore, if Mulberry fails to turn its performance around, shares could be hit very hard indeed.

Better Value Elsewhere?

Indeed, even traditionally highly rated peers such as Burberry and ASOS (LSE: ASC) seem to offer better value for money than Mulberry right now. ASOS is also experiencing a challenging period, with performance in China being a major disappointment for the company. It trades on the same P/E as Mulberry but, crucially, is forecast to see a far smaller dip in earnings this year (-18% versus -46% for Mulberry) and its problems appear to be more one-off, as opposed to a desertion of the brand as has happened with Mulberry.

Sector peers Burberry and Ted Baker (LSE: TED), which occupy spaces in the high-end retail segment, seem to offer strong growth and good value. For instance, Ted Baker trades on a price to earnings growth (PEG) ratio of just over 1, which is extremely attractive and its performance has been far steadier than that of Mulberry, with Ted Baker delivering average annual growth in profit of 18% over the last five years.

More Options

Meanwhile, Burberry should benefit from a resurgent China and, although shares trade on a P/E of 18.8, the brand’s strength is extremely strong. Therefore, profit growth should pick up pace from its 10% forecast growth rate for next year and, with large exposure to emerging markets, the company looks well-placed to deliver strong earnings growth going forward.

Although at the lower end than Mulberry, N Brown (LSE: BWNG) trades on the lowest P/E ratio of the companies featured here. Its P/E of 14 is only slightly ahead of the wider index (the FTSE 100’s P/E is 13.9), while it offers index-beating EPS growth rates of 5% this year and, potentially, 10% next year. Certainly, a less powerful brand than its rivals; however, N Brown could be a potential winner in the long run.

So, while Mulberry may entice core customers through lower prices, there is a big question mark hanging over the company. With it trading on a P/E of 72 and offering uncertain growth prospects, there seems to be better value and more opportunity elsewhere in the general retail space.

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Peter Stephens has no position in any shares mentioned. The Motley Fool recommends Burberry Group. The Motley Fool owns shares of ASOS.