Interactive Investor

Burberry 'blip' fails to dampen bulls

19th April 2017 13:57

David Brenchley from interactive investor

After LVMH, the world's largest luxury goods group, reported flashy results last week, investor expectations for Burberry's second-half update were high. As it turned out, they were too high.

It's why investors bailed out of Burberry Wednesday, as the British fashion icon missed expectations on a number of metrics. It's why the share price plunged almost 8% to a three-month low of 1,571p before a few buyers picked up cheap stock ahead of lunch.

Performance in its home UK market was "exceptional" and Continental Europe, particularly France, improved, while mainland China once again continued its impressive growth.

However, Burberry reported "challenging" markets both in the Middle East and Hong Kong, with the large Korean market declining after it wound down promotional activity. Meanwhile, its business in the Americas hit the buffers as US consumers preferred to shop abroad due to the strength of the US dollar.

In the six months to 31 March 2017, the fashion house saw underlying retail revenue jump 3% to £1.3 billion – include a weak pound and it was up 19% - with comparable sales (at constant foreign exchange rates) up 3%. However, fourth-quarter retail like-for-like sales increased just 2%, well below consensus estimates of 5% and second-half sales of £1.61 billion missed consensus by 1%.

Elsewhere, wholesale revenue fell 13% underlying, led by beauty down a fifth, while licensing revenue slumped 38% due primarily to the planned expiry of Japanese Burberry licences.

Crucially, there was no change to the company's full year 2017 pre-tax profit guidance, with foreign exchange delivering an additional £10 million boost since its January update.

Burberry shares have recovered well since June lows of £10.39 and are currently up over 50% since. But UBS analyst Helen Brand thinks this is a buying opportunity, reiterating her positive rating and 12-month target price of 1,990p. That implies potential upside of around 25%.

Chief executive Christopher Bailey certainly sounded all the right notes despite "an uncertain environment", as the company "takes action to strengthen the brand and reposition for growth".

"The outperformance of fashion and the strong customer response to new products underline our renewed creative momentum," he added. "While we have more to do as we build on our progress so far, we remain confident about Burberry's prospects in the longer term."

Brand's target price was raised at the beginning of this month, with a new management team of CFO/COO Julie Brown and CEO Marco Gobbetti, who will replace Bailey in July, to continue to drive momentum.

Technical analyst John Burford also put in a good word for the shares last week, noting that overseas visitors in the UK continue to visit in their droves due to the favourable exchange rate.

They did break above £18 soon after, but that drop below the bottom tramline on the chart above will cause a concern.

And, while Burberry shares have traded on sky-high multiples in recent years, a current forward price/earnings (PE) ratio of 19, even after this slump, is hardly cheap. It's also a premium to its 12-month forward PE average of the past 10 years.

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.