Mulberry Group: Business Review, Revenue, Product, Brand, and Digital Strategy

Business Review
Mulberry, founded in Somerset in 1971, is a British luxury brand with a rich heritage in leather craftsmanship. With a strong following in the UK, the Group is pursuing a strategy to become a global luxury brand through international expansion and extension of its lifestyle ranges. Mulberry operates a direct to customer model with 103 owned stores and 22 franchise partner stores across 25 countries, with a focus on developing its Digital business and its leading omni channel capability.

During the period, the Group continued to progress its International and direct to customer strategy, establishing new business entities in Japan and South Korea, and held a significant consumer focused event in Seoul during September 2018 to launch the new business.

With the digital network and subsidiary company development phase largely complete, the Group operates directly in all major markets and generates approximately 90% of revenue through Mulberry owned and franchise partner channels. Looking ahead, investment in International markets will be focused on brand development and leveraging the Group’s Digital and omni-channel network and recently established Digital partnerships.

The new businesses in Asia have supported the growth in International revenue which increased by 7% and represented 31% of Group revenue for the period (2018: 28%).

In the UK, the Group’s performance was materially affected by House of Fraser entering into administration during August 2018 and general weakness in the wider UK retail environment resulting in a 6% decline in revenue. During the second half of the financial period, the Group’s business with John Lewis was converted from Wholesale to retail concession, allowing the Group to recover a significant proportion of lost revenue associated with the House of Fraser disruption whilst progressing the Group’s direct to customer model.

Global Digital revenue continued to grow strongly, increasing by 27% to £36.9 million (2018: £29.0 million), helped further by the contribution of the strategic partnerships established during the second half of the period, including johnlewis.com, Tmall and Secoo.

As the Group advances its International and direct to customer strategy, it continues to take back ownership of distribution in target markets and launch new businesses. As these new ventures are undertaken, the Group plans investment to fund working capital and meet business launch requirements, including the repurchase of inventory previously sold to former distributors. During the period, several transactions were completed and non-trading financial effects resulted. In addition to these effects, the Group has also incurred debt write-off relating to House of Fraser’s entry into administration and fixed asset impairment charges. The Group has isolated these effects to report an adjusted profit in order to provide clarity on underlying business performance.

Business Review

Adjusted profit before tax for the period was £1.0 million (2018: £8.0 million). The reported loss before tax for the period was £5.0 million (2018: profit before tax of £6.9 million).
The implementation of agile supply chain processes contributed to a reduction in inventory of 11% to £39.7 million at 30 March 2019 (24 March 2018: £44.6 million). Net cash balances at 30 March 2019 were £11.1 million (24 March 2018: £25.1 million).

Revenue
Total Group revenue for the period was £166.3 million (2018: £169.7 million) with Retail revenue up 2%, including Digital revenue up 27%, and Wholesale revenue down 16%

Total Group Revenue† 169.7 166.3 –2%
Regional splits include Digital revenue; Global Digital revenue increased by 27% during the period to 30 March 2019.
Excluding the 53rd week, Total Group revenue decreased by 3% during the comparable 52 week period.

Product
The Group’s core focus on leather goods is complemented by a lifestyle range, with design and product development based in London and Somerset.

In leather goods, the Amberley family has cemented its status as a bestselling handbag and further animations were introduced to enhance the range during the period. Other newly launched handbag styles which gained momentum during the period include the Seaton, Leighton and Hampstead bag families. The category of mini-bags was further enhanced and developed, appealing to the modern customer’s needs.

The Artisan studio, which is based in the Somerset factories, provided several unique and limited edition collections including products to support the Korea business launch and the opening of the Regent Street store.

During the period, the Group successfully launched its first eyewear collection which includes iconic and fashionable sunglasses as well as optical frames. These ranges are distributed across the Mulberry store network as well as selected opticians in the UK. Other lifestyle categories saw further newness with a rotation of technology, soft accessories and jewellery as well as a new direction introduced for the men’s leather accessories range.

Brand and Marketing
Mulberry proudly celebrates its British heritage with a unique fusion of tradition and innovation while aspiring to offer the highest craft standards and value in its products. With a customer-centric focus, social and digital media play an increasingly important role in the Group’s marketing strategy.

SeoulxMulberry was held during September 2018 to coincide with the establishment of the new business entity, Mulberry Korea, with a pop-up shop offering a limited edition bag collection and other interactive features.

Revenue

In London, #MulberryLights (November 2018) featured a series of illuminating interactive experiences to coincide with the festive season whilst #MulberryReflections marked the official launch of the first Mulberry sunglass collection which was introduced during London Fashion Week (February 2019).

Digital and Omni-channel Platform
The Group continued to develop its own global Digital and Omni-channel business model whilst also establishing a network of strategic digital partnerships in key territories to provide high quality revenue and marketing reach.
In addition to its continued geographic expansion, several enhancements were introduced to the mulberry.com platform including improved search functionality, brand and product stories, live chat, the launch of a local currency and language site in Japan and local fulfilment services in Japan and Australia.

Strategic digital concessions have been established to complement the mulberry.com platform, build brand awareness and enhance the customer experience, particularly in strategic markets across Asia. As part of this initiative, new digital concessions were initiated with Tmall (Alibaba) and Secoo in China during the period. In the UK and as part of the transition of John Lewis stores to a concession arrangement, johnlewis.com converted to a new digital concession during November 2018.

Retail Store Network
The directly operated store network was further expanded and enhanced during the period.
The focus of the expansion was in Asia, where the Group increased its retail estate from 6 to 34 stores, acquiring 23 new stores as part of the new subsidiaries created in Japan (5) and South Korea (18) with 7 new stores opened in China (3), Japan (2) and South Korea (2). The Group closed its pop up location in Hong Kong and its store in Sydney as the Australia business transitioned to a franchise partner arrangement with Luxury Retail Group (“LRG”). In North America and Europe, the Group continued to refine and rotate the portfolio with a net decrease of 3 stores to 14 stores at the end of the period.

The UK network increased by 9 to 55 retail points of sale, reflecting the conversion of 15 John Lewis concessions and a new store on Regent Street whilst 2 non-strategic locations in York and London Stratford were closed and 4 House of Fraser concessions were closed as a result of the department store entering into administration. 

During the period, the Group continued to operate 17 stores at House of Fraser under a concession arrangement following its acquisition by Sports Direct plc.

The new store concept was introduced with the opening of the store on Regent Street during September 2018. The concept is a collaboration between British architect Faye Toogood and Johnny Coca, the Group’s Creative Director, and features design elements that represent the brand’s distinctive British heritage. The concept has introduced advanced technology features, including an innovative customer-facing mobile point of sale which has enabled traditional EPOS tills to be completely removed and created an enhanced customer experience in store.

Product

At 30 March 2019 there were 103 directly operated stores (2018: 69 stores), of which 48 stores were in International markets (24 March 2018: 23 stores) with 6 stores fitted out in the new concept.

Selective Wholesale and Franchise
As part of the Group’s strategy to improve customer experience, further Wholesale and Franchise business converted to Retail during the period. This included the formation of subsidiaries in Japan and South Korea, which were previously run by franchise partners, as well as the conversion of the Group’s business with John Lewis in the UK which was previously operated as a Wholesale partner.

As noted above and as a result of these changes, 23 stores from the franchise network transferred to own retail during the period and Wholesale revenue reduced.

Whilst the Group has transitioned several markets and the John Lewis business to Retail, highly valued multi-brand wholesale and Mulberry franchise partner businesses remain in place in the USA, Scandinavia, Australia, Southeast Asia, the UK and Europe.

Elsewhere in the network, 2 new franchise partner stores have been opened in Australia with LRG and 1 franchise partner store was opened in Dubai.

The franchise partner store network at the period end totalled 22 stores in Asia Pacific, Europe and the Middle East (2018: 45 stores), of which 3 stores are in the new concept.

Financial
During the period, the Group made progress in developing its international business and growing Digital whilst managing a challenging UK environment.

International revenue continued to grow as a result of expansion into Asia and the establishment of new subsidiaries in Japan, South Korea, China, Hong Kong and Taiwan, over the past three years. In addition to the scaling up benefit of converting revenue from Wholesale to Retail, growth is attributed to a greater focus on merchandising, development of the Group’s digital sales and selective store openings. At the same time, the Group has closed a number of stores in nonstrategic locations across Europe and North America. 

The expansion into Asia has required significant investment over the past three years to repurchase previously sold stock, acquire assets and to provide funds for working capital. During the period under review, £1.8 million was expensed relating to the set-up and launch of Mulberry Korea. Future investment in Asia will be focused on further developing the brand through marketing and the expansion of the digital and omni-channel platform.

In the UK, the retail market was challenging. In particular, House of Fraser’s entry into administration has materially affected revenue in addition to the bad debt and fixed asset write-off of £2.1 million. Although the Group entered into an agreement with Sports Direct plc upon its acquisition of House of Fraser, the business continued to trade below previous levels. The conversion of John Lewis from Wholesale to Retail during November 2018 has been a significant step in recovering UK revenue and improving profitability. Transitional costs of £1.3 million were incurred as part of the transaction relating to the write back of profit on inventories previously sold to John Lewis whilst it was a wholesale account.

Gross margin for the period to 30 March 2019 decreased to 61.5% (2018: 63.5%), primarily due to the write back of profit on the repurchase of previously sold inventory from John Lewis and the South Korean distributor when converting these businesses from Wholesale to Retail.

As described above, due to the expansion phase of the business and challenging UK conditions, the Group incurred a significant level of adjusting items during the period which totalled £6.0 million (2018: £1.1 million). The Group has isolated these effects to report an adjusted profit before tax in order to provide clarity on underlying business performance.