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Asian weakness burns Burberry

Shares in luxury retailer Burberry took another nosedive last week following a poor first-half trading update
October 20, 2015

Shares in luxury retailer Burberry (BRBY) are down more than a third from their 12-month high of 1,929p in February. That's probably not what Christopher Bailey wanted from his first year serving, somewhat controversially, as both creative director and chief executive officer.

IC TIP: Hold at 1,269p

 

In a first-half update this month, the raincoat-maker reported a 'mid single-digit decline' in Asia-Pacific retail sales, with particular weakness in Hong Kong during the second quarter. Burberry, like many luxury retailers, is highly dependent on Asia for a significant chunk of its revenues.

Elsewhere, the group reported double-digit growth across Europe, the Middle East and Africa and low single-digit growth in the Americas, although demand across the US was described as "uneven". On an underlying basis - which takes into account global currency movements - retail sales only rose 2 per cent at the group level.

Of that, like-for-like sales grew just 1 per cent. Burberry admits it will rely on new retail space to drive low single-digit percentage growth in revenues during the remainder of the financial year. On the wholesale side, revenues dipped 3 per cent to £305m while licensing revenues crashed 18 per cent to £26m, although this was broadly in line with what the market had been led to expect. Overall, pre-tax profit is expected to be reported in line with "recently updated" forecasts - referring to those analysts who downgraded numbers following the first-quarter update.

Makor Capital says… Burberry shares have significantly underperformed the luxury sector on the back of investors concerns on slowing top-line growth and lack of margin expansion. These concerns have recently intensified as the company has above-average exposure to Asia-Pacific and below average exposure to the strong Japanese market and eurozone. However, Burberry does have a strong digital and e-commerce platform relative to other luxury brands. This could drive revenue outperformance in the future. The group could also be a takeover target as the luxury sector remains highly fragmented. We recommend going long on Burberry. Buy.

JP Morgan says… These numbers were bound to be taken badly. It seems Burberry's deterioration is down to margin pressure and a sequential slowdown in sales which has remained above the sector average. We also think guiding for a pick-up in like-for-like sales and a £20m cost saving in the second half is not enough to get the market excited. There are other luxury plays that are cheaper, too. In our view, that makes it an unconvincing investment at this stage. We expect pre-tax profits of £445m for the current year, giving EPS of 75.3p, compared with £455m and 77p for the year ended March 2015. Neutral.