Mulberry issues profits warning amid falling earnings

Accessories group hit by fall in demand for luxury goods and bad strategies

Even as a new report showed that global wealth had jumped to a record $263 trillion, shares in two of Britain’s biggest luxury goods groups were taking a battering yesterday.

The once high-flying Mulberry saw its stock market value slashed by more than a fifth at one stage, as the handbags and accessories group issued the latest in a series of profits warnings.

In an unscheduled trading update, it warned that full-year profits would fall “significantly below” current market expectations. They had already been reduced but now it seems annual profits could slide to as little as £4 million.

Larger rival Burberry, meanwhile, saw its shares shed 5 per cent as a warning of tougher trading conditions overshadowed healthy first-half figures. Unlike Mulberry, where interim sales declined 17 per cent, Burberry posted another double-digit rise, of 14 per cent.

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Both companies are feeling the effects of a slowdown in worldwide demand for luxury goods, particularly in the previously hot Asian market.

Mulberry cited the lack of tourists in the UK for its dismal performance but the group is largely responsible for its own woes. Under former chief executive Bruno Guillon, it decided to concentrate its efforts at the top end of the handbags market, positioning itself alongside the likes of Prada – with prices to match.

It proved to be a disastrous strategy. Guillon exited in March and former boss Godfrey Davis was parachuted back in to oversee the launch of a new, more modestly priced range of bags. These are now on the shelves with price tags in the region of £600, rather than £1,200. Sales so far are said to be going well, but have come too late to rescue profits.

The £4 million analysts now expect Mulberry to make in the year to March 2015 takes its profits back to where they were in 2009, before it was lauded in the fashion press and began to believe its own publicity.

Profits reached a peak of £36 million in 2012, fell to £26 million the following year and virtually halved to £14 million last year. Its shares, which broke through the £23 level in 2012, closed last night at 675p.

In the fickle but lucrative luxury goods market, product is important but image and marketing even more so – and Mulberry has suffered self-inflicted wounds here too.

A promotional stunt featuring two of its new bags hanging from the gates of Kensington Palace, home to Prince William and the Duchess of Cambridge, had to be cancelled after complaints from royal officials.

Although Kate and other royals are said to be Mulberry fans, they were not amused by the sight of their home being featured in adverts. “We do not allow commercial photography at Kensington Palace,” sniffed a royal official.

Troubles at Tesco

Next month former

Tesco

boss Sir

Terry Leahy

will address an audience of entrepreneurs at a conference in London, at which he will reveal his tips on “how to innovate and take your business to the next level

”.

Let's hope he saves a couple of complementary tickets for Dave Lewis, who now has the mighty task of restoring both reputation and profits at Tesco after its series of disasters.

More senior executives were suspended at Britain’s biggest retailer yesterday, as investigations continue into its £250 million accounting scandal. On top of that, company secretary Jonathan Lloyd has handed in his notice and non-executive director Ken Hanna, who heads the audit committee, is also standing down when his six-year term comes to an end.

While Leahy was long gone at Tesco when the problems of overstated profits were revealed last month, there had been concerns in the City about some of the group’s racier accounting practices – and its treatment of suppliers – for years, and certainly during his lengthy tenure at the top.

Let’s hope his advice to the entrepreneurs next month includes treating their suppliers fairly and taking a cautious approach to adding up their own figures. Fiona Walsh is business editor of theguardian.com