Worst over for resurgent Burberry shares and luxury sector?

Resurgent Burberry Group (LSE:BRBY) shares picked up pace today as investors backed the luxury goods sector but shunned homewares despite a robust update by high-yielding Dunelm Group (LSE:DNLM).

Burberry is now worth £3.7 billion and in with a shout of returning to the FTSE 100 index in the March reshuffle, having risen by 80% from September’s low point near 575p.

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The trigger for today’s latest advance came from the read-across to a forecast-beating update by Cartier owner Compagnie Financiere Richemont SA Class A (SIX:CFR).

It boosted hopes that the worst may be over for the sector by reporting a “very solid” end to 2024, with growth of 10% leading to its highest-ever quarterly sales of 6.2 billion euros.

There was double-digit growth in all regions apart from Asia Pacific, where challenging demand conditions in China led to a 7% decline.

Europe sales increased by 19% as Richemont benefited from higher domestic demand and tourist spend, notably from North American and Middle East residents.

UBS called the update a “significant beat” as Richemont shares jumped 15% in Zurich and Lvmh Moet Hennessy Louis Vuitton SE (EURONEXT:MC) put on 7% amid a flurry of buying across the sector.

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However, Bank of America analysts sounded a note of caution: “2025 is the Chinese zodiac Year of the Snake. We think like the game of snakes and ladders, 2025 will see many ups and downs for the luxury sector.

“While the worst of the revenue decline is behind us, demand remains muted.

“There is a growing risk that 'cyclicality' is slightly more structural, especially if China is in a more prolonged recovery or there is a lack of creative newness and brand engagement to drive cultural relevance.”

Alongside Burberry near the top of the FTSE 250, the Rolex and Breitling retailer Watches of Switzerland Group (LSE:WOSG) put on 32.7p to extend gains since September to 40% at 516.5p.

Burberry is due to post its third-quarter figures on 24 January, which will be the first update since Joshua Schulman launched his Burberry Forward strategic plan in November.

He has pledged to work with urgency to stabilise the business and reposition the brand for a return to growth, including by focusing on outerwear and its British roots.

The plan appears to have been well received in the City, with the next landmark for investors whether festive trading has been strong enough to recoup a £53 million half-year loss.

Elsewhere in the FTSE 250, the flight from Dunelm continued after it reported sales growth of 1.6% to £490 million in its peak quarter. This follows 3.5% growth in the first quarter.

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Shares dropped 65.6p to 964.3p, leaving Dunelm more than a fifth lower than September amid weakness across the retail sector.

The stock now trades on about 13 times forecast earnings, offering a dividend yield of 8%.

Peel Hunt said a net cash position meant another special dividend was imminent, adding that any share price weakness was a buying opportunity based on its price target of 1,375p.

The bank highlighted Dunelm’s record of compound annual growth of 8% for revenues and 9% for profit since 2019, generating £1 billion of free cash flow and dividends of £960 million.

With the second-quarter sales figure some £15 million short of its forecast, Peel Hunt has cut its profit estimates for the current financial year and the next by 2%.

It added: “While recent trading has been challenging, Dunelm continues to outperform delivering sales and profit growth.”

Dunelm called its festive performance solid given the volatile market conditions, believing that it continued to gain market share.

It employs more than 11,500 staff, with the rise in employer National Insurance contributions an additional headwind on top of the National Living Wage increase.

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Initiatives to drive productivity across the business are under way, which it anticipates will mitigate the upward pressure on costs over the medium term.