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Mulberry: House of Fraser’s collateral damage

Shares in the leather handbag group plunged 30 per cent on the news of £3m in exceptional costs tied to House of Fraser, and tough UK conditions
August 22, 2018

It was perhaps inevitable that House of Fraser’s brief spell in administration, and subsequent takeover by Sports Direct (SPD), would have a knock-on effect for other retailers selling through the department store. But investors were seemingly taken aback by the repercussions for Mulberry (MUL), which operates 21 House of Fraser concessions. Indeed, shares in the luxury handbag group plummeted 30 per cent on the day of the news that it would report £3m in associated exceptional costs for the half-year to September.

IC TIP: Sell at 425p

The UK market has remained challenging, with sales in House of Fraser stores “particularly affected”. We already knew that Mulberry’s UK retail sales for the year to March 2018 were flat at £106m – representing around 70 per cent of the top line. In its latest trading update, the company warned that if such sales trends continued into the second half, its full-year profits would be “materially reduced”. The latter part of the year is vital for many retailers, comprising the lead-up to Christmas.

It wasn’t all gloomy. The rest of the world continued to trade broadly in line with bosses’ expectations. Encouraging, given that Mulberry has been expanding its geographical presence; international retail sales escalated by a fifth to £25.7m last year. And, in recent weeks, Mulberry completed its previously announced deal with distribution partner SHK Holdings, to establish Mulberry Korea.

Some might question why the shares took quite such a battering, particularly while Mulberry could continue its relationship with House of Fraser. Sports Direct boss Mike Ashley does, after all, want to turn the business into the “Harrods of the High Street”.

But a look at Bloomberg’s shareholder register offers some context; Mulberry’s top two investors – businessman Ong Beng Seng, and Banque Havilland – hold 56.2 per cent and 24.3 per cent, respectively. This takes a chunk out of the shares available to other investors, potentially leaving the remainder subject to illiquidity and share price fluctuations.