Burberry shares: better value than its clothes?

Yes, new Burberry chief Christopher Bailey is paid an obscene amount of money - £27 million in pay and perks, according to reports - but investors should put that to one side, it's a distraction. Instead, the focus should be firmly on the fashion house's growth prospects which, from these first-quarter results, look promising.

Retail sales jumped 17% at constant currency in the three months to June - historically the weakest time of year for sales - in line with management forecasts, and by a better-than-expected 12% on a like-for-like basis. And new stores should chip in low-to-mid single-digit percentage growth in sales for the year to March 2015.

Burberry's clobber remains hugely popular in mainland China and Hong Kong, so double-digit growth in Asia-Pacific, the company's biggest market, is unsurprising. But the America's did just as well, and digital, too. Weakness in some of its major markets - most likely fewer wealthy Russian tourists - did, however, limit sales growth in Europe, Middle East, India and Africa (EMEIA) to low single-digits.

Of course, the strong pound is causing Burberry problems. Most of its clothes and accessories are sold overseas, and sales rose a more modest 9% in the quarter at actual rates. And if exchange rates remain where they are now the impact on profits will be "material," admits the retailer. That works out to a £55 million hit, more than the £40 million previously flagged, and licensing revenue will likely fall by £10 million in 2015 if sterling stays where it is.

Both wholesale revenue for the six months to September and licensing revenue for the full-year will likely be flat at constant currency, although the beauty business, which generated £144 million of sales last year, is tipped to grow by a quarter in 2015.

Despite investing heavily in the business, Burberry had net cash of £403 million at the end of March and Bank of America Merrill Lynch forecasts £546 million for the current financial year. That's worth 123p per share, which when stripped out of the valuation equation still puts Burberry shares on a forward price/earnings ratio of over 17 (Merrill expects adjusted earnings per share of 75.1p this year), a big premium to peers.

Remember, the shares traded close to 150p in 2008. Less than three years later they were above 1,600p, but for the past 18 months - save for a brief spike last autumn - have remained locked in a range between 1,600p and 1,250p. At these valuations it's hard to see them breaking out any time soon. So, while Burberry is probably one for portfolios with a longer-term horizon, at 1,448p, the shares, like the company's expensive apparel, are no bargain.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.