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Burberry - Shares fall despite retail division improving

Equity research team | 18 October 2016 | A A A
Burberry - Shares fall despite retail division improving

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Burberry Group plc Ordinary Shs 0.05

Sell: 1,793.50 | Buy: 1,794.00 | Change 0.00 (0.00%)
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Shares fall despite retail division improving

Like-for-like retail sales returned to growth in the second quarter. However, the external environment remains challenging. Hong Kong and Macau continue to hold back growth in Asia Pacific and with demand in the Americas described as uneven, the shares slid 5% on the news.

Our View

Longer term performance has been excellent, as the business evolved from a British manufacturer of iconic trench coats to a global luxury brand. With a high percentage of sales now in the Far East, a slowdown in Chinese demand saw Burberry shares fall sharply from a peak of 1908p in February 2015.

Hong Kong, once the driver of sales growth, is experiencing negative footfall and conditions are clearly tougher, with margins coming under pressure. Burberry is promising cost cuts and a share buy-back, but it is likely that new CEO, Marco Gobbetti, who joins early next year, will have his own vision of how to reinvigorate the group.

Until then, the main bright spots come from the benefit that weaker sterling has brought. Currency movements could lead to profits being boosted by over £100m this year, which is a timely and significant boost given the tough trading conditions.

Taking the fragrance offer back in-house will dilute near term margins, but ultimately should see profits rise. Analysts expect this to lead to a growing cash balance, with consensus forecasts suggesting a steady rise towards £800m of net cash in the years ahead.

Luxury goods have been a good sector to be exposed to, because clients are prepared to pay handsomely for that special item, leading to good margins, most of the time. Luxury consumers are not risk-free clients, but they tend to be resilient, because wealth is typically more durable than income.

The store estate is still modest, trading from approaching 211 own stores, plus 205 concessions in department stores, 49 franchise stores and 60 outlets globally. So while expansion plans might be modest for now, there is plenty of scope to expand the retail business, as and when the right sites come up.

We still feel that Burberry has plenty of potential, but it could take a while for the good news to outweigh the bad.

First half trading in detail

Assisted by weaker sterling, reported Retail revenue of £859m is up 11% (+2% at constant currency rates). Like-for-like retail revenues returned to positive territory in the second quarter, up 2%.

EMEIA (Europe, Middle East, India and Africa) saw comparable sales grow by a low single-digit percentage, reflecting a higher spend from the travelling luxury customer. Following the fall in sterling, UK comparable sales increased by over 30%. However, in the Americas and Asia Pacific, comparable sales declined by low single-digit percentages.

Reported Wholesale revenue of £287m is down by 6% (-14% at constant currency rates) with Licensing revenue down 51% (-54% at constant currency) to £13m. Both declines are broadly in line with previous guidance.

Burberry remains on track to deliver cost savings of around £20m in FY 2017, and profit guidance is unchanged. Using 30 September exchange rates, FY 2017 reported adjusted retail/wholesale profit would benefit by about £105m compared to FY 2016 rates. The group expects net new space to contribute a low single-digit percentage growth to retail revenue, while wholesale and licencing revenue are expected to continue to decline.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

All yield figures are variable and not guaranteed. The information in this article is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned, nor is it a research recommendation. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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