Interim results from Mulberry Group (LSE: MUL) this morning have failed to impress the market and Im not surprised. The company reported a 17% fall in first-half revenue to 64.7m and a 1.1m pre-tax loss, which was driven by 2.8m of new store opening costs and lower profit margins.
Its clear that after spending heavily on new stores, Mulberry still has a lot to prove, despite a promising 8% rise in retail sales over the last nine weeks.
In contrast, Mulberrys larger peer Burberry Group (LSE: BRBY) reported a 14% rise in revenue during the same six month period, and with rising net cash on its balance sheet, was also able to announce a 10% interim dividend increase.
Growth investors might say that smaller Mulberry offers more recovery and growth potential than Burberry, but Im not sure this claim adds up.
Trading on past glories?
Mulberry shares currently trade on a sky-high 2015/16 forecast P/E of 113. The firms prospective dividend yield is similarly unappealing, at 0.5%.
Buying a share trading at this kind of valuation is always going to be risky: in my view Mulberrys share price still reflects the past glories of 2012, when the firm hit peak earnings per share of 43p. Unfortunately, repeating this would require a 500% increasein next years forecast earnings of 6.8p per share.
Even if Mulberrys earnings do make it back to 2012 levels in a few years time, todays share price would still equate to a P/E of 18 hardly a bargain.
Whats more, I very much doubt Mulberrys sales growth will make up for the collapse in its operating profit margin, which has fallen from a peak of 21% in 2012 down to 8.4% more in-line with its historic average.
Burberry may be better
In contrast, Burberry trades on a typical growth P/E of 20, based on next years forecast for earnings of 84p per share. The firms attraction also extends to a 2.3% prospective yield for 2015/16.
Burberry products also deliver more consistent profits the firms operating margin has stayed firm between 17% and 20% since 2010.
On the other hand, Burberrys shares are currently at an all-time high, so a disappointing Christmas could knock the share price. However, despite this risk, Burberry would be my pick of these firms, as I think it is more likely to deliver positive returns over the next couple of years.
After all, investing in growth stocks such as Mulberry can deliver outsized returns — but it can also be a fast track to big losses.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
