Positive shock triggers Burberry share price surge

In sharp contrast to its recent history, Burberry Group (LSE:BRBY) has provided a positive outlook shock which has resulted in a healthy share price spike in opening trade.

The update comes after an annus horribilis for the stock, following its shock announcement last July, when the group announced a change of Chief Executive, a suspension of the dividend and a likely operating loss.

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA

The resulting “Burberry Forward” strategy which the group announced in November is unlikely to result in overnight success, although the group’s aspirations have been clearly stated. Burberry wishes to return to a more focused and traditional luxury brand, with particular emphasis on the outerwear for which it has become traditionally known, while eschewing the more modern and niche launches which simply did not resonate with their customers. The group also acknowledges that its pricing policy, especially for leather goods, was too rich for its “category authority” in the space.

And there is some momentum building. The group has estimated that following signs of progress over the last quarter and during the festive season in particular, it is possible that results from the second half of the year could broadly offset the adjusted operating loss of the first. This would be a major early win for the group which would place the recovery on a much firmer footing. By the same token, Burberry recognises the uncertain macroeconomic environment such that it remains to be seen whether such a turnaround is achievable.

• 14 stocks expected to move sharply after posting results
• The only two assets pro investors are bullish on right now
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

In the meantime, and despite the progress, the pressure points are clear, with a decline of 4% overall in comparable store sales. Underneath the bonnet, there are some mixed signals. The Asia Pacific region, which is made up of 90% retail by mix and accounts for 42% of group revenues, saw sales fall by 9%, including a drop of 7% in Mainland China and 19% in the South Asia Pacific. Europe, the Middle East and Africa suffered a decline of 2% on a combination of lower local and tourist sales, although there was some more positive news from the Americas, where local spend pushed sales 4% higher.

As a result, retail revenue declined by 7% to £659 million in the quarter, although the drop was significantly less than some had feared. Burberry has highlighted its encouragement following the “It’s Always Burberry Weather” outerwear and “Wrapped in Burberry” festive campaigns, while a recent improvement in sentiment towards the luxury goods sector could also provide a tailwind.

It is possible that a line in the sand has been drawn, and the Burberry share price has rocketed 50% higher over the last three months, due to signs of an improving Chinese economy following its stimulus measures, a strong recent showing in the luxury goods sector, particularly from Compagnie Financiere Richemont SA Class A (SIX:CFR) and reports of a potential bid from Moncler SpA (MTA:MONC) of Italy, although any such approach did not subsequently materialise.

The positive read across from Richemont’s numbers was perhaps not entirely justified, especially given Burberry’s performance across Europe, and while there has been no further speculation, it could perhaps be argued that on a valuation basis Burberry remains vulnerable

• Rolls-Royce and Aviva shares tipped to surge again
• Sector Screener: why prospects for housebuilders will improve

Despite the recent share price hike and even including today’s leap, the shares remain down by 9% over the last year, as compared to a gain of 7% for the wider FTSE250.

The jury remains out for the time being and investors will take some convincing that “Burberry Forward” strategy is having some effect and that the group can escape from its recently chequered past. As such, these numbers in isolation are extremely unlikely to move the dial, which would leave the market consensus of the shares as a hold in place.