Burberry Group PLC – Published 09/05/19

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Company Overview:

Burberry (BRBY) was in the news at the beginning of March 18 when it announced a new chief creative officer, Ricardo Tisci, had been appointed. Tisci was previously at the French couture and perfume house, Givenchy, so his expertise sits well with Burberry’s intention to move the brand further into luxury goods. The market certainly approved the move, marking the shares up nearly 6%. Earlier in the year they had lost ground on the departure of Christopher Bailey, who had been design director, then chief executive, for a total of 17 years.

Investors had mixed views of Bailey, as Burberry’s sales in the Middle East and China had weakened somewhat. Last year, the company appointed Marco Gobetti, who has a long track record in managing luxury brands, as chief executive. The hope was that a dream team of Gobetti as CEO and Bailey back running the creative side of the business, would boost sales. However Bailey has decided to cut all ties and move on to fresh challenges.

Trading update and forecasts

At the end of 2017, Burberry had 205 stores worldwide, as well as 57 outlets, 47 franchised stores and 199 concessions in other stores.

However, the Christmas Q3 trading update wasn’t pretty. Overall sales were down 2% in the quarter to 31 December, coming in at £719m whereas previous expectations had been for a figure nearer £739m. UK sales declined sharply last year and key Chinese sales slowed. To some extent, year on year numbers were bound to show a fall in UK retail sales because the steep drop in the value of sterling after the Brexit vote, boosted overseas visitors to the UK, providing a 40% rate of growth in Q3 2016.

Burberry is forecasting that its full year 2018 profit will meet estimates of £464m. CEO Gobetti is looking to boost margins by cutting costs with £60m saved in the period to March 18. He has said that his strategy for improving profitability and revenue won’t bear fruit until 2021.

Earnings and Dividends

What does that mean for earnings? Burberry’s market capitalisation is just over £7bn. Estimates are that on revenue of around £430m up to March 18, earnings should be 80.5 per share and the dividend should rise from last year’s 38.9 to 40p this year. Guidance from brokers is that in March 19, earnings will be down somewhat at £453m with earnings per share 82.7p and a dividend of 40.8p. Not exactly stellar growth. The dividend yield is currently 2.32%, with dividend cover of 1.66 times.

Over the past year, the share price has traded in a range between 1,498 and 1,985. Currently the price is hovering around the 1,700 mark and the price / earnings ratio (PE) is 25.97. While that’s not cheap, Burberry does have very low debt levels – a net debt to equity of 0.21 which with its power to generate cash, gives the company a stronger balance sheet than many others in the sector.

Protectionism a major risk

Burberry has more to lose than many companies, from a ratcheting up of trade protectionism. Its key Chinese market might suffer if extra tariffs were imposed as a side effect of tensions between the US and China. However, CEO Gobetti’s strategy to move the brand to an ultra-luxury status may mean that Burberry customers are simply too affluent to care about a further mark-up.

Investors need to believe that Gobetti can deliver on his strategy and increase the dividend, if they are going to add Burberry to a long-term portfolio.