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Burberry - signs of recovery and dividend reinstated

Sophie Lund-Yates, Equity Analyst | 13 May 2021 | A A A
Burberry - signs of recovery and dividend reinstated

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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: 1,788.50 | Buy: 1,790.00 | Change 13.00 (0.73%)
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Burberry full year revenue fell 10% to £2.3bn, ignoring the effect of exchange rates. Comparable store sales, which includes online sales, were down 9%. The declines reflect store closures, reduced tourism and reduced discounting. Underlying operating profit fell 8% to £396m, ahead of market expectations.

However, the group warned that underlying operating margins in the new financial year will be adversely affected. That reflects a ramp-up of spending following cutbacks because of the pandemic, and increased investment.

The group's reinstated the full year final dividend of 42.5p, which is equivalent to the 2019 payment.

The shares fell 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 year end 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. Thankfully, this isn't the case. This is particularly important for Burberry, 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 will be a boost to margins in the long-run, and it's a strategy we admire.

There are some challenges though.

Luxury fashion is heavily reliant on tourism spending, and the lack of international travel has hit revenues. 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.

The market also didn't take too kindly of news margins are going to suffer next year. But in our view, the planned ramp-up in spending is necessary and reasonable if Burberry's to keep hold of its newly found momentum.

The group's balance sheet is in reasonable health too, with net debt massively reduced. This not only adds some breathing room while the turnaround continues, but means the dividend's back on the menu.

Overall, we think Burberry is well placed - a strong brand and balance sheet 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. We note the price to earnings ratio is some way above the ten-year average, so there could be some ups and downs in the short-term as the world continues to navigate out of lockdown.

Burberry key facts

  • Price/earnings ratio: 25.2
  • Ten year average Price/earnings ratio: 20.3
  • 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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Full year results (at constant currency unless otherwise stated)

Although there were declines overall, comparable sales of full price items rose 7% in the year. This reflected a positive reaction to new collections and pricing strategies. Revenue rose 8% in the second half, and comparable store sales rose 32% in the final quarter. This is thanks to positive trends in Mainland China, Korea and the U.S.

The Asia Pacific region (94% of retail) was the only area to post growth, with comparable store sales rising 18%, with the strong trading led by Mainland China and Korea. Like-for-like (LFL) sales were up 53% in Mainland China in the final quarter, and strength elsewhere offset declines in South Asia Pacific and Japan. Total revenue rose 16% to £1.2bn.

In Europe, Middle East and Africa (59% retail), revenue of £628m was 35% behind last year. Although trends have been improving, LFL sales were down 44% for the year (this was -26% in the final quarter). The region's been particularly affected by travel restrictions and store closures. The Americas (86% of retail) saw comparable store sales drop 9%, and revenues were £475m, down 15%.

On a net basis, the group closed four mainline stores, with 11 new openings are 15 closures.

Overall Retail sales fell 9% to £1.9bn, while the Wholesale business saw revenue drop 17% to £396m. Underlying operating profit for the joint division fell 6% to £361m. Licensing underlying operating profit fell 21% to £35m.

Group underlying operating margins actually improved from 16.4% to 16.9%, despite the reduction in revenue, partly thanks to increased sales of full price items.

Burberry's free cashflow was up over fivefold at £349m, reflecting lower lease payments, lower capital expenditure and tax payments, and well controlled inventory. Net debt, including leases, was £101m, compared to £538m at the same time last year.

For the next financial year Burberry expects continued efforts to reduce markdowns to reduce comparable store sales by mid-single digits. Capital expenditure will increase at least £65m on this year to £180-£190m, reflecting increased investment in store refurbishments and digital infrastructure.

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.