We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

Burberry - Transition on track, bags on trend

George Salmon | 11 July 2018 | A A A
Burberry - Transition on track, bags on trend

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Burberry Group plc Ordinary Shs 0.05

Sell: 1,769.50 | Buy: 1,770.50 | Change 13.00 (0.74%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

A trading statement from Burberry confirmed like-for-like sales growth of 3% in the first quarter. That's slightly ahead of the rate of growth we saw in the second half of last year.

New CEO Marco Gobbetti remains pleased with progress, and there's no change to profit guidance.

The shares fell 4.5% in a weak wider market.

View the latest share price and how to deal

Our view

Macro Gobbetti is focused on consolidating Burberry's position at the very top of the fashion value chain. That will take time, but if it can be done the rewards are considerable.

The transition involves reviewing where and how its products are sold. Digital outlets will get more investment, while Burberry's physical stores are getting a refurb to maintain that premium image. Of most interest is the decision to cut ties with several non-luxury partners that offer its products on a wholesale basis.

This withdrawal means sales and profits are being forfeited in the short term, so Burberry is taking a bit of a gamble. However, Gobbetti has clearly come to the conclusion that selling in sub-optimal conditions, and potentially diluting the premium image, is the greater risk.

We empathise with his view. In fashion, appearances matter, and Burberry's 161 year old brand is its most valuable asset. Gobbetti appears mindful of the adage that it takes years to build a reputation, and minutes to lose it. In the UK the group is only just shaking the 'football hooligan' image its caps garnered in the early noughties.

However, home shores are just a small part of the overall business. Instead, East Asia is the driving force behind growth. After a few years of key Chinese shoppers tightening the purse strings, the group says its 'top customers' are starting to return.

The man tasked with enticing them back is Gobbetti's fellow Italian, new Chief Creative Officer Riccardo Tisci. He's got a good reputation in the industry, having breathed new life into the Givenchy brand in recent years. Hopefully, he can keep hitting the right notes at Burberry.

Overall, we like Burberry. Management has shown a willingness to grasp the nettle and do the right thing for the business long term. The group should be well-placed to profit from increasing affluence in the Far East, and also benefits from the fact luxury consumers are prepared to pay handsomely for that special item. This means high margins and impressive cash generation are both possible.

The shares offer a prospective yield of 2% and trade on 26.1 times expected earnings, a premium to the historic average.

Register for updates on Burberry

First quarter trading details

Burberry's like-for-like sales growth was driven by a mid-single digit percentage improvement in Asia Pacific and a strong showing in the Americas, where sales rose by a high single digit percentage. Newly launched handbags, such as the Belt and D-ring performed well.

Elsewhere, reduced demand from tourists impacted both the UK and Continental Europe, with the Middle East remaining weak due to macroeconomic factors. That saw EMEIA like-for-likes fall by a low single digit percentage.

Burberry expects to achieve £100m of cost-savings this year, and while operating profits look set to fall, the headwind from adverse exchange rate movements has eased. Its repositioning continues, with the flagship store in Dubai relocated, and two outlets closed.

The first collections from new chief creative officer Riccardo Tisci will be available in September, with a Vivienne Westwood collaboration hitting selected stores in December.

Find out more about Burberry shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.