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Burberry - still waiting for lift off

George Salmon | 23 January 2019 | A A A
Burberry - still waiting for lift off

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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: 1,860.50 | Buy: 1,862.00 | Change 24.00 (1.31%)
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Burberry has confirmed it still expects to hit guidance for the full year, but like-for-like sales in its third quarter rose 1%, behind the 3% growth seen at the half year.

The shares fell 2.1% on the news.

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Our view

Marco Gobbetti is focused on consolidating Burberry's position at the very top of the 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 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 wholesale partners.

The withdrawal means sales and profits are being forfeited in the short term, so Burberry is taking a bit of a gamble. However, Gobbetti clearly thinks 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 163 year old brand is its most valuable asset. In the UK the group is only just shaking the 'football hooligan' image it acquired in the early noughties.

Gobbetti's fellow Italian, Riccardo Tisci, has come in as new Chief Creative Officer. He's got a good reputation in the industry, having breathed new life into the Givenchy brand, and his first collection has been well received. It's early days and stock is still being updated, but let's hope he can keep hitting the right notes at Burberry.

Much of the growth potential is in the Far East, so it's good to see sales trends and interaction through social media rising. But the Chinese authorities have shown a willingness to crack down on individual resellers of luxury goods. It would be problematic if it becomes harder to reach what the group has previously called its 'top customers'.

Overall, we like Burberry. Management has shown a willingness to grasp the nettle and do the right thing for the long term. Luxury consumers prepared to pay handsomely for that special item, high margins and impressive cash generation are both possible.

These features, and a balance sheet packed with cash mean the dividend, which offers a prospective yield of 2.6% next year, should still grow through the transformation - but as ever there are no guarantees.

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Third quarter trading details

Retail revenue of £711m in the quarter is down 2% at constant exchange rates, with the impact of two fewer stores more than offsetting a small rise in LFLs.

Across the regions, Asia Pacific benefited from Mainland China sales rising by mid-single digit percentages. In EMEIA (Europe, Middle East, India and Africa) there was a small quarter-on-quarter improvement in tourist spending, but sales in the Americas were impacted by softer footfall trends.

Among the highlights in the quarter were a positive reaction to a limited edition collaboration with Vivienne Westwood, and continued growth in Burberry's social media presence. Quarter on quarter, the group added more than 1m followers across Instagram and WeChat.

Burberry still expects to report broadly stable revenue and adjusted operating margin at the full year stage, and remains on track to deliver £100m in cumulative cost savings.

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The author holds shares in Burberry.

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.