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Bail out of Burberry

Slowing growth at Burberry appears to confirm our fears that the luxury goods bubble is deflating
July 11, 2012

Burberry is famous for its posh raincoats, which is fitting given the luxury goods retailer's shares remain under a cloud after its latest trading update. Its shares fell 9 per cent after it reported underlying sales growth of 11 per cent in its first quarter, lower than the market had expected, and well below the 34 per cent it managed in the same period a year ago.

IC TIP: Sell at 1173p

The slowdown appears to confirm our suspicion that demand for luxury goods is being affected by ongoing economic worries in the eurozone and a slowing Chinese economy. Status-hungry Chinese buyers have been a hugely important driver of luxury goods demand and, while Burberry said growth in the country was in the mid-teens, that's half the rate it managed a year earlier. A month ago, leather goods specialist Mulberry saw its shares come under pressure after it reported a similar slowdown, while rivals including Prada and LVMH have also recently pointed to increasingly challenging trading conditions.

Burberry may also be suffering as a result of its decision to axe some of its cheaper ranges, with broker Cazenove questioning "whether it is wise to cut access price point in a tougher macro environment". It believes that the move has hit the US business disproportionately hard, and that sales there barely grew on a like-for-like basis in the period.