Fashion industry struck by China lowdown

Mulberry warning raises fears Asian demand for luxury goods has peaked

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The Independent Online

A profit warning from Mulberry wiped £187m off the designer's market value yesterday and sparked a sell-off across the luxury sector as it became the latest brand to highlight weak growth in China.

Its sought-after "It bags", such as the £795 Alexa bag or its classic £695 Bayswater, have failed to lure enough overseas shoppers, while its wholesale shipments slumped 4 per cent, sending the company's shares down by 24 per cent.

The disappointing results for the six months to October followed a profit warning from Burberry last month, while alarm bells of a Chinese slowdown have already been rung by US jeweller Tiffany & Co and the upmarket clothing brand Hugo Boss.

Luca Solca, the global head of European research at CA Chevreux, said: "Slower macro growth in China is finding its way into more subdued luxury goods sales. This joins the very low domestic demand in Europe, as well as question marks on how the fiscal cliff in the USA will play out.

"It would be logical to anticipate lacklustre relative share price performance by the sector, as more bad news is likely to come on the table."

Following the news from Mulberry, shares in the French luxury giants LVMH and Gucci's owner PPR – which reports results tomorrow – both fell 2 per cent. Burberry lost 3 per cent while Mulberry ended down 314p at 1,006p.

Mulberry's UK retail sales grew by 10 per cent during the half year to October, with sales up 6 per cent to £76.5m. But the company's difficulties lie in its overseas business.

Its finance director Roger Mather said: "We're not falling over a cliff, it's just everyone's got used to enjoying compound annual growth of 25 or 30 per cent, and this year is a pause for breath. The share price will be what it will be. We've got to grow this brand."

Mulberry blamed its poor figures on the repositioning of its brand – it is reducing the number of shops that sell its goods in Europe and has cut the amount it sells at a discount in outlets such as Bicester Village in Oxfordshire.

Mulberry had been manufacturing bags exclusively for the discount market, but the new chief executive Bruno Guillon, who joined from Hermès in March, scrapped this production line.

Mr Mather explained: "We really want customers buying at full price from our expensive retail locations."

While one expert explained Mulberry's decision to cease selling its products in many Italian stores was due to the fact that its expensive handbags were ending up on the "grey market" and sold in China, hitting its brand value.

Despite the excuses, City analysts described the profit warning as "severe", and Philip Dorgan at Panmure Gordon said: "Mulberry is now at the crossroads."

Mulberry's woes were not echoed across the pond by the US handbag brand Coach. In its first-quarter update the brand reported a 10.6 per cent rise in sales to $1.16bn (£728m), driven by both overseas and US sales. Coach, which uses actress Gwyneth Paltrow as its "face", met analysts' expectations for the three-month period to October with net profit of $221m, up from $215m in the previous quarter.

But prospects for the luxury sector globally remain gloomy, with China still a major concern. Last week's Swiss watch data revealed exports in September fell for the first time in nearly three years, driven down by weaker Asian demand.