Once the poster child for the British luxury goods industry,Mulberry(LSE: MUL) has lost its way over the past two years.
The groups 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 Mulberrys 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,Mulberrys 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
Mulberrys 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 years mid-year strategy change, Mulberrys sales are showing signs of life.Group retailsales 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.
City analysts expect Mulberrys earnings per share to jump by 170% this year after last years terrible performance. EPS of are 5.68p are expected, which leaves the company trading at a forward P/E of 160.
Whats 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 dont leave much room for error if Mulberry fails to live up to City expectations.
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. Mulberrys gross and net margins came in at 68.2%, and 5.3% respectively for the same period.
Moreover, Burberrys return on equity, the amount of net income returned as a percentage of shareholders equity, hit 27.5% last year. Mulberrys ROE was a lowly 10.2%.
To an extent, Burberrys high returns justifythe companyspremiumvaluation. The group is currently trading at a forward P/E of 20.7, falling to 18.2 next year.
However, Mulberrys lackluster returns do not support the companys valuation.
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.
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