Luxury goods company Mulberry is attractive for long term investors

Helal Miah, investment research analyst at The Share Centre, adds Mulberry to the ‘buy' list and explains why it has attractions for long-term, higher risk investors.

"Mulberry's core business is the design, manufacturing and retailing of fashion accessories, primarily ladies handbags, aimed at the luxury market. Its heritage of English craftsmanship and that the products are made at the firm's factory in Somerset is a main selling point for the brand.

"The group has seen substantial sales and profit growth in recent years, with 2011-2012 sales up 38% for the year at £168.5m and profit before tax standing at £36m, up 54%. As the company has grown, it has benefitted from economies of scale, keeping costs down and allowing for impressive margins of 66.2%.

"Although the group is heavily reliant on handbags, which represent 77% of total sales, there is still plenty of growth potential. Mulberry has been diversifying its product range by selling women's footwear and apparel, which has seen the largest growth amongst Mulberry products in the last year.

"Growth seekers will be also encouraged to hear the group has recently completed the extension of the existing factory, increasing capacity by 30%. Plans have also been announced to open a second factory in Somerset, at a cost of £7.5m, which should double the production capacity. For the current year, Mulberry plans to open a further 15 to 20 stores globally.

"The company has a healthy balance sheet of £27.3m in cash and has little or no debt on its books. However, despite strong orders, the company remains cautious of the current global economic environment and reported weaker than expected sales in its latest trading update. The recent pullback in the share price and the sector as a whole has been pinned down to moderate growth in China.

"We believe this weakness represents an entry point for long term investors willing to accept a higher degree of risk to ‘buy' Mulberry. Although the UK still accounts for 61% of revenues the group is in the early stages of expanding internationally. Other luxury brands are doing extremely well from developing countries where the evolving demographics favour luxury goods. There is an appetite for luxury products from affluent Chinese consumers and we believe Mulberry has the potential to also see significant demand and can prosper too."