- Leverage approaching upper limit
- Full-year revenue target looks out of reach
The post-pandemic boom in luxury consumption appears to have truly fizzled out. Jeff Bezos has once again overtaken LVMH (FR:LVMH) CEO Bernard Arnault as the world’s second-richest person, LVMH shares having fallen 20 per cent from their 2023 highs and most peers (Hermès (FR:RMS) aside) doing likewise. Meanwhile, shares in Burberry (BRBY) have slumped following an ominous interim report.
Revenue growth has all but stalled in many parts of the UK’s only luxury fashion house, with store sales in the Americas tumbling by 9 per cent. The company recently launched its Winter 2023 collection and claims early demand indicators are “encouraging” – but full-year guidance has nonetheless been revised downward.
If conditions fail to improve management said “we are unlikely to achieve our previously stated revenue guidance for FY2024”. In this case, it predicts adjusted operating profit would come in at the lower end of its £552mn-£668mn range.
The group also saw its adjusted net operating expenses rise by 10 per cent at constant exchange rates due to its investments in stores and marketing, as well as the impact of inflation on staff costs. Its net debt to adjusted Ebitda ratio also crept up to 0.9 times – nearing the top end of its 0.5 to 1.0 times target range.
This increase in leverage was attributed to its share buyback programme and “seasonal working capital outflows”. Bearish sentiments around the luxury sector have arrived at an inopportune moment for Burberry, which has been trying to rebuild its reputation at the more exclusive end of the market.
Analysts at UBS said the group’s interims "supported our thesis that it is difficult to turn a brand around in a weaker macro environment”. Although shares look cheap at around 14 times forward earnings, we fear they may have further to fall. Hold.
Last IC View: Buy, 2,380p, 18 May 2023
| BURBERRY (BRBY) | ||||
| ORD PRICE: | 1,600p | MARKET VALUE: | £5.7bn | |
| TOUCH: | 1,598-1,600p | 12-MONTH HIGH: | 2,656p | LOW: 1,550p |
| DIVIDEND YIELD: | 3.9% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 310p | NET DEBT: | 79% | |
| Half-year to 30 Sept | Turnover (£bn) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
| 2022 | 1.35 | 251 | 49.1 | 16.5 |
| 2023 | 1.40 | 219 | 42.4 | 18.3 |
| % change | +4 | -13 | -14 | +11 |
| Ex-div: | 14 Dec | |||
| Payment: | 26 Jan |
