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Burberry bounces back

RESULTS: Burberry's retail performance is recovering after last year's profit warning, but after a hefty re-rating the shares look up with events
November 14, 2013

The apparently hefty earnings growth reported at the half-year stage by luxury goods retailer Burberry (BRBY) isn't quite as impressive as it first seems. Underlying operating profit was broadly flat on the year at £173.6m, although - set against the backdrop of the group's profit warning just over a year ago - that performance isn't too bad.

IC TIP: Hold at 1,495p

Burberry's core retail division - which generates 67 per cent of group sales - appears to have bounced back strongly, with like-for-like sales growth of 13 per cent. Most of that improvement reflects self-help measures, and while global footfall into the group's shops was still soft during the period, consumers are migrating online - which kept divisional sales growing. Burberry also promoted its leather goods and outerwear more aggressively in its stores, which boosted the average price per sale. Accordingly, retail revenues increased by an underlying 17 per cent to £695m. Retail performance in Asia is also looking good - Hong Kong performed strongly and mainland China delivered double-digit percentage growth. That backdrop should leave new chief executive Christopher Bailey, who takes over from Angela Ahrendts in mid-2014, with a slightly easier task.

However, the wholesale division proved to be more problematic. Although underlying revenue there grew by an acceptable 13 per cent in the period to £295m, this was heavily dependent on a first time contribution from beauty products. Strip this out and wholesale revenue actually fell 7 per cent as retail customers managed stock conservatively during the half. Burberry is investing heavily in promoting its beauty products and hopes this will generate £140m of wholesale revenue this year.

Management's overall forecasts for the full year were largely unchanged. Net new store openings of around 10 are expected to add mid-single digit percentage growth to retail revenues, while capital expenditure of £200m is also anticipated to fund retail expansion.

Broker Nomura expects pre-tax profit of £470m for 2014, giving EPS of 77.7p (from £248m and 70p in 2013).

BURBERRY (BRBY)

ORD PRICE:1,495pMARKET VALUE:£6.63bn
TOUCH:1,495-1,497p12-MONTH HIGH:1,687pLOW: 1,146p
DIVIDEND YIELD:2%PE RATIO:23
NET ASSET VALUE:231p*NET CASH:£208m

Half-year to 30 SepTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20120.8811219.58.00
20131.0315925.88.80
% change+17+42+32+10

Ex-div: 24 Dec

Payment: 24 Jan

*Includes intangible assets of £201m, or 45p a share