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Burberry eyes £4bn in annual sales

Wealthy tourists have returned to Europe, but are heading to the continent
November 17, 2022
  • Gross margin up
  • Attractive valuation

The third-quarter luxury earnings season has shown that demand remains resilient for wallet-busting handbags and watches. Consumers are still willing to splash out on high-end goods. A range of European companies, such as Hermes (FR:RMS) and LVMH Moet Hennessy Louis Vuitton (FR:MC), have posted results far ahead of forecasts, helped by well-off tourists being able to shop again in Europe. London-listed fashion house Burberry’s (BRBY) interim results were perhaps less eye-catching, but nevertheless displayed progress towards chief executive Jonathan Akeroyd’s new medium-term goal of hitting £4bn in annual sales.

There is perhaps something ironic in the fact that the results were boosted by a weak pound (Burberry has significant international sales and reports in sterling) at the same time as the company set out a plan to “refocus on Britishness and strengthen our connection with British design, craft and culture”. It seems as though the company may have a challenge on its hands with this approach. The UK government’s reversal of its tax-free shopping plans for tourists has hit sentiment. Chief operating and financial officer Julie Brown said on an analyst call that US tourists have been heading to Milan and Paris rather than London to spend their dollars at fashion houses, something she called “really, really disappointing”.

It is no surprise, then, that continental Europe was a standout performer in the half. The French and Spanish markets helped sales in Europe, the Middle East, India, and Africa (EMEIA) increase by 23 per cent. Revenues in the Americas grew by 14 per cent, while Asia Pacific sales were up by a less impressive 1 per cent. The stringent Covid-19 measures still in place in China hurt the top line there, with sales down by 19 per cent on the mainland.

Strong pricing helped the gross margin increase by 80 basis points to 70.1 per cent, and the company’s pricing power was seen across divisions. Accessories, which management wants to see take over half of all sales, drove revenue forwards with a 14 per cent uplift. The men’s and children’s divisions enjoyed 10 per cent growth, and women’s 8 per cent. Not bad with the wider narrative of crumbling consumer demand. 

Deutsche Bank analysts said that the company’s medium-term sales target “is reassuring as consensus currently only breaches £4bn in financial year 2028”. Burberry shares trade at 17 times forward earnings according to the FactSet consensus, which compares favourably with LVMH on 22 times, Hermes on 43 times and Moncler (IT:MONC) on 23 times. The share price has outstripped luxury competitors over the past 12 months, and a long-term £5bn annual sales target displays management’s ambitions. It remains to be seen, however, how the new ‘British’ approach will unfold. Hold.

Last IC view: Hold, 1,589p, 18 May 2022

BURBERRY (BRBY)   
ORD PRICE:2,011pMARKET VALUE:£7.77bn
TOUCH:2,010-2,011p12-MONTH HIGH:2,074pLOW: 1,474p
DIVIDEND YIELD:2.60%PE RATIO:18
NET ASSET VALUE:395pNET DEBT:33%

Half-year to 01 Oct

Turnover (£bn)Pre-tax profit (£mn)Earnings per share (p)

Dividend per share (p)

20211.2119135.811.6
20221.3525149.116.5
% change+11+31+37+42
Ex-div:15 Dec   
Payment:27 Jan