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Burberry - upgrades full year guidance

Sophie Lund-Yates, Equity Analyst | 12 March 2021 | A A A
Burberry - upgrades full year guidance

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Burberry Group plc Ordinary Shs 0.05

Sell: 1,783.00 | Buy: 1,784.50 | Change -114.50 (-6.04%)
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Burberry has continued to see a 'strong rebound' since December. Full year revenue and underlying operating profit are now expected to be higher than market expectations.

Comparable store sales in the final quarter are predicted to grow 28-32% compared to this time last year, although for the year as a whole group revenue will be down 10-11%. Underlying operating margins are likely to be 15.5-16.5%.

Burberry's full year results announcement will be on 13 May 2021.

The shares rose 8.8% following the announcement.

View the latest Burberry share price and how to deal

Our view

We're encouraged by the positive trends being seen at Burberry. The stronger-than-expected end to year comes off the back of a resilient third quarter.

We'd been concerned products might fail to resonate, with a pandemic putting people off splurging on Burberry's collections - especially with the all-important shop fronts closed for chunks of time. The latest announcement proves this isn't the case.

Getting the fashion right is particularly important for Burberry at the moment, since it's throwing a lot of money at a strategic turnaround.

Marco Gobbetti has focused on consolidating Burberry's position at the very top of the value chain. The plan calls for a review of how products are sold, including cutting ties with non-luxury partners. The obligatory restructuring (with accompanying cost savings) makes an appearance too, while digital channels and stores themselves are also getting some serious TLC. The pivot to the top end of the value chain will be a boost to margins in the long-run, and it's a strategy we admire.

There are some challenges remaining though.

Luxury fashion is heavily reliant on tourism spending, and the lack of international travel has hit revenues hard. Although global sales have recovered (and at a faster rate than we'd feared), thanks in part to a corresponding increase in domestic spending, it's still likely to be a while before people are filling airport terminals.

The scrapping of the non-EU VAT scheme will disrupt Burberry's established revenue patterns too. The scheme made the UK a popular destination for retail tourists from the Middle East and Asia alike, and these shoppers made up a significant chunk of revenues. The question now is whether these sales will be recouped in other regions. In theory, much of this spending could transfer to other countries, but what this means for the UK is yet to be seen.

Fortunately, the group's balance sheet is formidable, with £542.1m of net cash towards the end of September (if you don't count lease obligations). That hasn't stopped it cutting the dividend, but it does mean management has the firepower to weather a crisis while still investing in a turnaround plan, showing increasing signs of progress.

Overall, we think Burberry is well placed - a strong brand and mountain of cash is a powerful combination. Given the underlying reaction to new ranges and the uptick in full price sales, we think Burberry's in a good position to boost sales, margins and ultimately profits in the longer term. With the world's road out of lockdown incomplete - there could be some ups and downs in the short-term. We note the price to earnings ratio is some way above the ten-year average.

Burberry key facts

  • Price/Earnings ratio: 27.5
  • ten year average Price/Earnings ratio: 20.2
  • Prospective dividend yield (next 12 months): 1.9%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter trading details (20 January 2021)

Retail revenue fell 5% to £688m in the third quarter. That reflects a planned reduction in sale items and reduced tourist traffic in outlets because of the pandemic. These factors offset high single-digit growth in full price sales.

The group is "encouraged" by its Q3 progress, but acknowledged that headwinds persist because of continued store closures. Burberry also said the VAT retail export scheme, which allowed VAT refunds for non-EU tourists, has stopped because of Brexit. This is expected to have a "more significant impact" when travel patterns begin to normalise, and could see reduced sales to tourists, if the region becomes less popular with non-EU shoppers.

Within Asia Pacific, comparable store sales rose 11%. Mainland China recorded "strong double-digit growth", and online sales more than tripled. Trading in Korea has been good, but Japan and South Asia Pacific continue to be affected by reduced tourist footfall.

In Europe, Middle East and Africa, significantly lower tourist demand failed to offset a small increase in local demand in continental Europe. As a result, comparable store sales declined 37%. The store estate saw closures move from 5% in Q2 to 19% in Q3.

The Americas saw a decline of 8% in comparable store sales, as a reduction in markdowns offset stronger growth in full price items.

New store space and pop-ups contributed 4% to sales in the period. 15% of stores are currently closed and 36% are operating at reduced capacity.

For the full year, Burberry expects "trading will remain susceptible to regional disruptions". Gross margins are expected to benefit from higher full-price sales, regional and channel mix as well as reduced stock provisions. Cost savings are on track and inventory is due to finish below last year's levels.

Find out more about Burberry shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.