Mulberry's rerating pipe dream

Although Mulberry's push into Asia helped lift international sales by 13 per cent during the first half, the strategy feels at least 10 years behind schedule. Burberry (BRBY) has spent decades developing a presence in the region, while the Mulberry board has only turned its attention eastwards in earnest within the past two years. And while Asian sales may finally be gaining traction, over 70 per cent of income is still generated in the UK.

Unfortunately, Mulberry is finding its domestic market difficult to navigate. The House of Fraser collapse forced it to take a £2.1m provision in the first half and is symptomatic of a tough retail environment. It’s interesting, therefore, to see Mulberry signing a new concession agreement with John Lewis – another department store struggling to maintain its profitability. While the terms of the agreement are said to be more favourable, one wonders whether hitching your wagon to such a large high-street chain is the most sensible move in the current retail climate. But, in Mulberry’s view, John Lewis is “a strong festive retailer”, and one that offers up the right clientele for its average price point.

With no analyst in the market currently providing earnings forecasts (hence our abridged tip table), company-issued guidance for an underlying pre-tax profit this year is all we have. But this hasn’t been quantified, and a statutory loss of £8m at the half-way stage means investors need to look elsewhere to assess what value may, or may not, be on offer. The company’s enterprise value (EV) represents 1.2 times last year's sales, while last year's gross margin came in at 63 per cent. The EV/sales rating is half that commanded by luxury peer Burberry, while Mulberry's gross margin is not too far adrift of the 69 per cent achieved by its more highly rated rival. While this could be regarded as a draw, further down Mulberry's profit-and-loss account things look much grimmer.

Last year Mulberry's operating margin of 6.3 per cent compared with 15 per cent from Burberry. Were we looking at a recovery story in Mulberry, such a low margin could suggest ample room for profit improvement. However, with the UK sales outlook weak, operating expenses up at the half-year stage and minimal company guidance, we see little grounds for optimism on this front. What's more, Mulberry doesn't look like a viable takeover target given any potential acquirer would have to buy out two majority shareholders.