This beaten-down ‘almost’ penny stock trades 180% below its target price!

Luxury fashion brand Mulberry (LSE:MUL) is trading near penny-stock territory after a torrid year for its sector. The shares are currently worth around 110p each, down from 245p a year ago, and £24 a decade ago. 

A fall from grace

Investing in penny stocks, or almost penny stocks, is inherently riskier than investing in more mature companies. These are stocks that can experience considerable volatility given their lower levels of capitalisation. Moreover, there tends to be a wider spread between buying and selling prices. 

It’s also worth highlighting that only a fraction of the stock is publicly held, and this can heighten volatility. Mike Ashley-backed, FTSE 100-listed Frasers Group controls a 37% stake and Malaysian billionaire Ong Beng Seng owns a 56% stake.

Mulberry isn’t quite at penny stock levels, but it’s almost there. The company’s market-cap has also fallen dramatically in recent years — currently just £63m. 

So what’s happened?

Over the past year we’ve seen weakness in the luxury goods market. In the year ended March, Mulberry said group revenue declined 4% from the prior year. This was expected to some extent following a disappointing Christmas period. Moreover, we’ve also seen luxury goods groups, including LVMH and Gucci owner Kering, sounding the alarm bells. 

Internationally, Mulberry noted that retail sales were up just over 7%, but UK sales fell 3.2%. International sales were helped by the opening of new stores in Sweden and Australia, but these investments also contributed to an expected loss for the year. 

Likewise, in a challenging market, Mulberry’s full-price strategy appears to be missing the target as consumers increasingly take notice of promotional offers elsewhere. This was compounded by the UK government’s decision to scrap VAT-free shopping for international visitors. 

More pain to come?

Management said it would be prudent to assume that recent negative trends will continue for the near term. The Asia-Pacific region had represented around 40% of the company’s market, with South Korea and China reflecting some of the most promising international markets. However, a challenging backdrop in China has negatively impacted company-wide growth. 

And despite a pledge from chancellor Jeremy Hunt to review the scrapping of VAT-free shopping, there was a missed opportunity in his last budget so it’s far from guaranteed.

The upside is that Mulberry’s been building brand awareness and market penetration in the lucrative North American market. Australia also bucked the trend in the Asia-Pacific region, with sales moving in the right direction. 

Moreover, in the long run, I expect Mulberry to benefit from premiumisation trends and the movement towards sustainable patterns of consumption. 

The bottom line

Luxury stocks have taken a beating in recent months, and clearly there could be more pain to come before things get better.

Interestingly, the stock’s only covered by one City brokerage which has maintained a price target of 308p for the beaten-down AIM stock — 180% above the current price. However, with a ‘hold’ rating, it appears the broker hasn’t updated its appraisal of the stock. 

As much as I’d love to invest in a company from my home county (Somerset) I’d need clearer signs the business is on the right track. It is, of course, tempting to invest in a brand that was once worth many times more than today. And there’s nothing to say the good times couldn’t return.