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Broker Tip: Burberry set for currency headwinds

Burberry (BRBY) made headlines this week as shareholders staged a massive revolt at its annual general meeting - despite a robust first quarter result. But what do the brokers think?
July 17, 2014

What's new:

• Shareholder revolt over executive pay

• Strong LFL Q1 growth

• Currency headwinds persist

IC TIP: Hold at 1419p

High-end fashion house Burberry (BRBY) first quarter results were overshadowed by a massive shareholder revolt at the company’s annual general meeting. More than half rejected the retailer's remuneration report, which offered chief executive Christopher Bailey an eye-watering, multi-million pound pay package. However, the vote is not binding and the pay deal is still likely to be implemented.

As for the actual trading statement, sales grew 17 per cent in the first quarter, although currency headwinds trimmed this figure down to 9 per cent. Like-for-like sales rose 12 per cent, with double digit growth in Asia Pacific – driven by China and Hong Kong - and the Americas, alongside low single-digit growth in Europe, the Middle East, India and Africa. Digital outperformed across all regions, and four stores were opened, including three in European airports.

Management also warned that if exchange rates remain at current levels, the full impact on reported retail/wholesale profit this financial year would be “material”. For instance, rebasing the 2014 retail/wholesale profit for current exchange rates cuts it by £55m and wipes half a percentage point off the operating margin. What's more, at current exchange rates, reported licensing revenue this year will be £10m lower given the movement in the sterling/yen rate.

Charles Stanley says…

Accumulate. Burberry appears particularly well positioned to benefit from global demand for luxury goods, given its iconic brand, industry-leading marketing techniques, and action being taken to leverage the franchise into new product areas. Earnings growth in the current year is expected to slow sharply to a low single-digit percentage, reflecting significant foreign exchange headwinds and disruption caused by the decision to move operations in Japan from a licencing model to a fully owned and operated model. These factors are also expected to act as a brake on growth in 2015/16, but we expect underlying profit growth to remain healthy in both years. The shares look fairly valued at current levels, but we suggest using any share price weakness as an opportunity to add to holdings.

Berenberg says…

Hold. Burberry shares have underperformed the SXXP and FTSE indices over the past 12 months by 21 per cent and 7 per cent respectively. On a P/E-relative basis, Burberry is below its seven-year average and is oversold, which may appear harsh given the underlying resilience of the top line. However, the risk of lacklustre earnings leverage persists through to 2017 due to currency headwinds, the loss of Japanese profit associated with the licence termination from June 2015, incremental costs on the back of the roll-out of the Japanese global product offering and gross margin dilution as the beauty sales footprint expands. We expect EPS of 76p this financial year, equating to P/E ratio of 19 and have a 1,550p price target.