Mulberry Profit Warning – Better Late Than Never

On Saturday (18/8/2018) I wrote about the damage to suppliers from the pre-pack administration at House of Fraser. One of the companies mentioned was Mulberry Group Plc (MUL) and I queried why they had not issued an RNS announcement indicating the likely impact on their profits. I suggested it could be £2.4 million.

This morning Mulberry issued a profit warning that spelled out the likely figure. There will be a provision of £3 million of “exceptional costs” related to the 21 “concessions” that they operated in House of Fraser stores. That arises from “a review of debtor balances, fixed assets and potential costs that may result from restructuring”.

For the avoidance of doubt, I have never owned the shares, nor bought their products. They do sell some nice handbags at £1,000 plus though. Both the products and the share price are too rich for me. At a prospective p/e of over 50 even before this morning’s profit warning, they must have some loyal followers.

The share price has fallen by 17% this morning at the time of writing. I hope shareholders in Mulberry will complain to the Insolvency Service (part of the BEIS Department – the responsible Minister is Kelly Tolhurst M.P.). The insolvency regime needs major reform.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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House of Fraser – The Real Damage from the Pre-Pack and to Mulberry

I have covered the abuse of pre-pack administrations and the case of House of Fraser in two previous blog articles. But now that the initial administrators report has been published the real damage is very clear.

House of Fraser had total debts of £884 million of which trade suppliers were owed £484 million. The latter means goods supplied to the company, and sitting in the stores being sold to customers which will not be paid for by either the administrator or the new owners. The suppliers included big names such as Mulberry, Giorgio Armani, Gucci and Prada plus no doubt a large number of smaller suppliers as is common in the “rag trade”. Some of the latter might well go bust as a result.

Let’s look at luxury products supplier Mulberry which is a UK listed company (TIDM MUL). They are owed £2.4 million when last year their net profits were £6.2 million so the potential hit to their profits is very substantial as the administrator is very unlikely to pay them. What might offset those losses?

They might have “reserved title” on the goods supplied if they wrote their contracts correctly although such claims are typically resisted by administrators. They might also have insured the risk of not being paid by their customers in which case the cost will fall on the insurers. They may also do some kind of compromise deal with new owner Mike Ashley whereby he pays a figure to ensure continuity of supply. But Mulberry have made no public announcement of the likely impact on profits which is surely required sooner or later from a public company. Perhaps they are still trying to figure out the impact or are simply “in denial” about the cost.

Retail concession operators within the House of Fraser stores are also in a difficult position. Stock in the stores is theirs and has been removed in some cases. But past sales will have been put through the House of Fraser till system. The cash may be in a trust account, or it may not.

Retail customers of House of Fraser have also been affected, particularly those who ordered products from the company’s web site. These should have been delivered from warehouse operator XPO Logistics who are owed £30 million and stopped processing orders soon after the administration. Whether the customers will get refunds or will have to claim against their credit card suppliers is not currently clear.

The House of Fraser web site is currently unusable so they will be missing a lot of potential orders. The site simply says “We’re currently working hard to make some improvements to the website” which is a misleading euphemism for “systems needing to be totally rebuilt with a new supply chain”.

You can see from the above that although a pre-pack administration appears a simple way for a business to continue while jobs are protected, in reality it is far from simple and enormously damaging to a wide range of people and companies. The bankers and lenders to the company are first in line for any payout as “secured” creditors but typically all other creditors get nothing in such cases. It seems unlikely that it will be any different here.

In conclusion, you can see from the above, and the impact on the pension fund of the company covered in a previous article, that pre-pack administrations are only simple solutions for insolvency practitioners and bankers. For everyone else they are a nightmare. The disruption they cause creates much wider impacts and justifies looking for a better solution to the problems of companies that are losing money and running out of cash.

THE INSOLVENCY REGIME NEEDS REFORM. THERE ARE BETTER SOLUTIONS TO THE HANDLING OF INSOLVENT BUSINESSES.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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