The Value Perspective

Spot the difference

Kevin Murphy

26 Jun 2012

A comparison of Mulberry and Kesa is highly revealing

Let’s compare and contrast two very different companies. Mulberry, which we do not own, is a UK-based luxury goods group beloved by investors while Kesa, which we do own, is a predominantly French electrical retailer the market is currently shunning. However, it is arguably a comparison of the valuations of the two businesses that is most striking – and revealing.

The stockmarket does not like electrical retailing these days for a number of reasons – not least because the internet has posed some awkward questions for the sector and because we are in a recession. What the stockmarket does love, however, is luxury goods companies that are growing quickly, and Mulberry certainly ticks both those boxes.

As a result, were you looking to buy the entire market capitalisation of Mulberry, it would cost you over £900m (even after the recent share price falls!) and for that you would acquire sales of about £170m and an EBITDA – earnings before interest, tax, debt and amortisation and essentially accountant-speak for cash operating profits – of £40m. A similar exercise with Kesa would cost you £250m and net you sales of £4.3bn and EBITDA of £170m.

To put it another way, with Kesa you would obtain the same amount of cash profits as Mulberry has sales but for less than a third of the price, which is a stark and, to us, very interesting comparison. None of which is to suggest Mulberry is anything other than an excellent and well-managed business but, as ever, the price you pay is the most important determinant of future returns and so the principles of value investing would suggest Kesa’s shares ought to outperform Mulberry’s on a long-term view.

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