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Buy quality Burberry

Burberry's shares have had a rough year, but here's why we think it's a buying opportunity in the making
November 19, 2015

Luxury retailer Burberry's (BRBY) share price is down by more than a third since its February highs due to concerns over a weakening Asia-Pacific market and, more recently, terror attacks in Paris where the fashion house has a major presence. But the long-term quality of Burberry's brand and operations means this could be a buying opportunity despite expectation of falling profitability. So, while the business faces some short-term challenges, we have faith in the company's market-leading position, the quality of its products and its expertise in digital marketing and management.

IC TIP: Buy at 1,269p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Quality track record
  • Cash-rich balance sheet
  • Digital leader in the sector
  • New branding strategy
Bear points
  • Falling margins
  • Exposure to Asia-Pacific weakness

Burberry is exposed to consumer weakness in Asia-Pacific and especially China. In the first half of the financial year, sales fell by a mid-single-digit percentage compared with the prior year. Lower footfall in Hong Kong and weaker sales in mainland China in the second quarter were key issues. But the company is making strides in Japan after deciding to transition from a licensed to a retail operation. Although Burberry is coming from a small base, sales there grew more than 50 per cent in the first half. Chief financial officer Carol Fairweather said there's still a "significant opportunity" for growth in Japan - one that could help offset weakness in other parts of Asia.

Importantly, the company is fully aware of the challenges it faces - particularly in Hong Kong. To buck up trading out there, it has fast-tracked a number of new products into stores, redirected its marketing campaigns to focus on local consumers, kept a close watch on operating costs and is busy renegotiating property leases - including the one for its enormous flagship store. Flat sales at the group level were also supported by Asian consumers who chose to purchase Burberry products abroad, suggesting the brand's popularity with customers in the Far East is stronger than it first appears.

 

 

Across all other global territories, Burberry sales are up. In Europe, the Middle East, India and Africa (EMEIA) sales grew by a double-digit percentage, while the Americas saw sales rise by a low single-digit percentage in the first six months. For its established markets, the company is hoping a new branding strategy will help maintain enthusiasm for the products. Head designer and chief executive Christopher Bailey wants to "purify the offer", according to analysts at JPMorgan, and it's hoped the addition of special labels denoting the "runway collection" will send some fashionistas into a buying frenzy.

Mr Bailey will also continue pushing the company's digital strategy, which has propelled it to the top of the pile compared with its industry peers in recent years. That means more collaborations with Apple Music, the growing social media platform Snapchat and live-streaming seasonal fashion shows with pieces available for immediate purchase hot off the runway. Burberry has also launched its annual festive advert featuring an all-star British cast including Sir Elton John, actress Julie Walters, comedian James Corden and Romeo Beckham, son of footballer David. Ms Fairweather says the company has "never been better prepared" for the crucial festive trading period, with over 200 special in-store events planned in the run-up to Christmas.

BURBERRY (BRBY)
ORD PRICE:1,253pMARKET VALUE:£5.6bn
TOUCH:1,253-1,254p12-MONTH HIGH:1,929pLOW: 1,236p
FORWARD DIVIDEND YIELD:2.8%FORWARD PE RATIO:16
NET ASSET VALUE:310pNET CASH:£459m

Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20132.0042869.825.0
20142.3346075.929.0
20152.5245577.132.0
2016*2.5543673.635.2
2017*2.7145876.634.6
% change+6+5+4-2

Normal market size: 1,000

Matched bargain trading

Beta: 1.16

*JPMorgan forecasts adjusted PTP and EPS figures