Mulberry crash attracts wave of buying

Things look pretty grim for Mulberry right now, but investors are buying the shares. Lee Wild discusses whether they really are a recovery prospect, or if this is just a dead cat bounce.

Fancy handbag maker Mulberry Group has had an interesting few years both in terms of the business and subsequent shifts in the share price. Reaction to the latest hit to profits should surprise no one, but the share price correction has been met with enthusiastic buying, and the shares are currently up 8% in the current trading session.

Briefly above £24 in spring 2012, Mulberry's share price bottomed out at 391p yesterday, its lowest since 2010. Over the past six years, the firm has issued several profit warnings, triggered either by a wider economic slowdown, read-across from luxury goods peers like Burberry, or problems of its own making.

However, investors are backing Mulberry to pull out of this latest nosedive that’s seen the shares lose up to 63% of their value in 2018 alone. 

On Monday, after they'd crashed as much as 31%, Mulberry was the fifth most-bought stock on the interactive investor trading platform. Today, the shares traded as high as 460p, up 18% from yesterday’s eight-year low, and investors are still buying. 

Source: interactive investor      Past performance is not a guide to future performance

This demonstrates that such a high-risk approach can pay off handsomely – market-makers don't always get it right, and share prices are often marked down too harshly, initially at least. And prices regularly bounce post-profits warning as speculators move in. However, they don’t always keep those gains as pessimistic shareholders use such bounces to bail out.

Question for investors now is whether they're happy making a quick turn or whether they should stick around for the long haul.

News that Sports Direct International acquisition of House of Fraser assets could cost Mulberry, which currently runs 21 House of Fraser concessions, £3 million of profits, caused this week’s dive. The company is owed £2.4 million by the department store, which Sports Direct owner Mike Ashley will not cover. 

In addition, there is a more serious warning that annual profits will be "materially reduced" unless there is an improvement in UK sales trends during the key second half trading period.

Source: interactive investor      Past performance is not a guide to future performance

Mulberry still generates around two-thirds of its sales in the UK despite a big drive toward a 50:50 split between domestic and international revenue. And overseas is clearly where the money is.

The company has been spending heavily building a presence outside the UK, especially in Asia, and it was international like-for-like sales that rose 1% in the 10 weeks to 2 June versus a 7% fall in the UK.

With a global economy in good shape and Mulberry's leather handbags and accessories highly sought after, prospects should be good. Well-documented problems exist, however. Overseas shoppers are thinking twice before jetting into London, often preferring lower prices in other capital cities. 

Mulberry must continue to see a return on the money invested overseas to capture a big enough slice of a market that is surely the key to its future success. Failure to accelerate the pace of international growth will likely be reflected in further downside pressure on the share price.