ii view: Burberry yet to fire on all cylinders

Shares in this luxury brand retailer are down around 15% over the last year. We assess prospects. 

First-quarter update to 2 July

• Same store sales up 1% year-over-year
• Retail revenues up 5% to £505 million and unchanged when adjusting for currency moves

Chief executive Jonathan Akeroyd said:

"Our performance in the quarter continued to be impacted by lockdowns in mainland China but I was pleased to see our more localised approach drive recovery in EMEIA (Europe, Middle East, India and Africa), where spending by local clients was above pre-pandemic levels. Our focus categories, leather goods and outerwear continued to perform well outside of Mainland China and our programme of brand activations boosted customer engagement. While the current macro-economic environment creates some near-term uncertainty, we are confident we can build on our platform for growth."

ii round-up:

Founded in 1856 by Thomas Burberry, today the company has become a global luxury brand with annual sales of over £2 billion. 

Burberry (LSE:BRBY) sells a range of clothing including outwear and leather goods. Retail store sales account for around four-fifths of revenues with most of the balance coming from its wholesale business. 

Retail outlets as of early April numbered 218 stores, 143 concessions, 57 outlets and 38 franchised stores.

For a round-up of this latest trading update, please click here.

ii view:

Following on from previous initiatives, Burberry continues to revamp its stores and build on digital innovation. During its last financial year, it opened 38 new stores and closed three. Digital initiatives include marketing via social media channels including both Instagram and Tik Tok. Management is now targeting high single-digit revenue growth and 20% margins over the medium term at constant exchange rates.   

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For investors, the importance of China and Asia cannot be overlooked with the ongoing pandemic in China impacting this latest quarter. Its store numbers in the Asia Pacific region account for just over half of its overall portfolio. Heightened tensions between China and the West are also worth remembering, while a potential economic slowdown in North America remains an overhang.

On the upside, growth in same store sales excluding China of 16% offers reassurance that demand more broadly remains relatively robust. A strategic update under the group’s new leader is planned to accompany its November interim results, while a £400 million share buyback programme is being executed.

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An estimated future dividend yield of around 3% is also not completely derisory in an era of still low if rising interest rates. On balance, and while some caution looks sensible given an uncertain economic outlook, an estimated analyst consensus fair value share price of over £19 implies optimism for those willing to hold for the longer term. 

Positives: 

• Product and geographical diversity
• £400 million share buyback programme

Negatives:

• Some tourism still hindered by the pandemic
• Currency movements can provide headwinds

The average rating of stock market analysts:

Hold