Mulberrry: Struggling With Depressed Demand (OTCMKTS:MLBGF)


Mulberry (OTC:MLBGF, OTC:MLBGY) is a British luxury goods company best known for its leatherworking. It has its own network of shops and a well-regarded brand in the luxury space. However, it is a small player and that has exacerbated its struggles amid demand depressed by the pandemic. Avoid.

About Mulberry

The company has a key brand, Mulberry. The brand is well-regarded but the lack of a portfolio approach has made itself felt recently, as when consumers tighten their belts, there is no lower priced brand in the portfolio for them to trade down to. Additionally, as an independent, niche player, the brand lacks the heft and security that come with being part of a larger luxury goods house like Louis Vuitton Möet Hennessy (OTCPK:LVMHF, OTCPK:LVMUY) or Kering (OTCPK:PPRUF, OTCPK:PPRUY). It thus relies more on the attractiveness of its mainline brand.

Despite its British associations, the company sources from multiple countries including lower cost countries. It says rather cryptically that its U.K. factories support up to fifty per cent of its leather bag production, whatever that means. Given its premium price points, I think that this is a challenge: as a consumer, I would sadly expect a midmarket brand like Coach to use factories in low cost countries, but I wouldn’t expect of it Louis Vuitton, for example. Mulberry at its high end is comparable to LV.

The Pandemic Has Hit Mulberry Hard

The pandemic and recession have combined in an unfortunate hit for the company. Not only are some consumers spending less on luxury goods, greatly reduced international travel also means lower interest in the quintessentially English brand.

In its preliminary results released this week, the company revealed that even though its year ended 28 March, which meant limited impact from COVID-19 in key western markets, it still took a huge hit. That is partly explained by its exposure to markets such as South Korea and China, which imposed pandemic restrictions earlier in the quarter than western countries.

Revenue fell, and the reported loss increased significantly. The adjustments are partly due to a change in accounting standards and has impaired £24.9m due to forecast lower trading in its London outlets. Such non-cash adjustments make the results look worse than they are. Nonetheless, even before adjustments, a slim pre-tax loss in the prior year slid to a meaty pre-tax loss in the latest one.

Source: company prelim results

Similarly, changing accounting standards meant that what looked like a worsening of the balance sheet was not as dramatic as it may at first seem.

Source: company prelim results

Some of the company’s lease payments are contingent upon sales. In forecasting these, it forecasts possible future lease liabilities. This explains why non-current lease liabilities have shot up under the new accounting standards.

So, overall, while the results are weak they are not as bad as they may at first appear.

Most of the company stores are now open again. It reported that trading was weaker in capital city locations but stronger elsewhere, although I interpreted that to mean stronger than in cities – I would be surprised if non-city sales levels in physical stores are stronger than they were in the equivalent period last year. Indeed, the CEO described levels of footfall as alarmingly low. Digital channels continue to see sales growth. The company acknowledged significant uncertainty about future sales performance but said that the current year sales will likely be lower than last year’s. It said it expected losses to be reduced, but given the high headline losses of the year being reported, that is to be expected. Even reduced losses could still be sizeable.

The Dividend is Suspended

The company typically pays out one dividend annually. In recent years that has been pegged at 5p per share. In its most recent interim results, the company announced that it would not be paying out a dividend this year. It said that it wanted to maintain a robust liquidity position due to uncertainty about both the duration and the impact of COVID-19.

In its detailed reporting on the reason for dividend suspension, the company also noted that it was related to the company’s use of the government’s coronavirus job retention scheme. In other words, after relying on the scheme to help pay bills, the company decided that paying a dividend would not be seen to be in good taste.

Longer term there are questions about the sustainability of the dividend. Coverage in the past five or six years has been markedly weaker than it was before.

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Basic EPS (P)

9.9

8.1

6

4.5

5.2

29.8

43.9

32.2

14.5

-2.3

4.5

8.4

8.3

-8.2

-78.9

Dividend (P)

1

1.5

2

2

2.2

4

5

5

5

5

5

5

5

5

0

Coverage

9.9

5.4

3

2.3

2.4

7.5

8.8

6.4

2.9

-0.5

0.9

1.7

1.7

-1.6

n/a

Chart compiled by author using company annual reports

Those figures are not promising. Earnings have fallen precipitously and dividend coverage is weak, or negative. Although the company has had a good run of dividend payments up till now, there is a case to be made that the prudent dividend cancellation seen this year marks a rebasing of dividends

Shareholder Perks Include a Discount

Note that the company offers shareholder perks including a 20% discount in designated shops for shareholders holding at least 500 shares. Details are on the company website. That’s good to know for shareholders.

Conclusion: Tough Times Ahead

Mulberry has an attractive product lineup. However, its results have been patchy over the years and its share price reflects this.

Source: Google Finance

Unfortunately there is little good news, for now. The pandemic has hit the single-brand, niche operator hard and that may continue for some time. Losses are set to continue and I see little medium-term upside in the shares given the risks. Avoid.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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