Trade of the Week: Asia bores a hole in Mulberry

Falling international sales amid a wave of retrenchment from Asian buyers saw British luxury goods maker Mulberry issue a severe profit warning this week, sending the stock crashing by 30% on Tuesday – and offering a smart return for those with a short interest in the stock.

 

   The news caught the market off-guard. According to a survey by Thomson Reuters, no analyst had a sell rating on the stock in the run-up to this week. Mulberry has a mean rating of buy across five analysts, with two strong buys, one buy and two holds.

 

   That meant the stock was not high on many short sellers' radars in the run-up to Tuesday; only 0.65% of Mulberry’s total shares were out on loan as of last week, according to Markit Data Explorers.

   But for those fortunate holders of a short position on the stock, shares borrowed and sold short at £13.30 and bought back at Tuesday’s low of £9.40 would have yielded an overnight gain of 29.3%. That would translate into a gain per share of £3.90.

 

   The slide was triggered by a full-year profit warning at the luxury goods group, which warned on Tuesday morning that a 4% decline in wholesale shipments of its goods to markets such as South Korea, coupled with a slowdown in other key international markets, would wipe out any profit growth for 2013.

 

  Philip Dorgan, an analyst at broker Panmure Gordon, said in a research note: “Mulberry’s profit warning is severe. Given that it has had a tremendous run in terms of both share price and profits, it is now at the crossroads. Either, we are wrong about the scale of its international opportunity, or this is just a blip.”

 

  Panmure is maintaining its buy rating on the stock, but has slashed its target price from a lofty £20 to a more modest £11. That price is based on a multiple of three times the firm’s estimated sales for full-year 2013. The stock had recovered slightly by Thursday lunchtime to trade close to £10.20.

Panmure says it now expects Mulberry to make a profit of £31m this year, down from a prior estimate of £42m, and a profit of £37m next year, down from £52m.

 

   Mulberry’s news followed a similar profit warning last month at its larger peer Burberry. The FTSE 100 firm warned that its full-year profits for 2013 would be below some analyst expectations, on the back of lower buying of its fashion wear from China. The news sparked a 21% slide in the fashion chain’s share price.

 

   According to an analysis by Nomura, both firms have lagged their European peers in the luxury goods sector this year, even before the impact of Mulberry’s profit warning is taken into account. In the year to October 8, Mulberry’s share price lagged the MSCI All-Country Europe equity index by 32.3%, while Burberry was behind 27.7%.

 

  That compares with an outperformance of 56.9% for Prada, and 16% for fashion conglomerate Luxottica. Outperformance for the sector as a whole was 6.2%, the bank’s analysts said.

A spokeswoman for Mulberry said the firm could not comment further on the results owing to a closed period.