Still betting on Burberry

A new creative vision could be just the ticket to reignite sales growth. A third-quarter fall in retail sales of 2 per cent has put the market on edge. Some analysts fear Burberry is running £572m short of its annual sales target of £2.23bn, while others are confident the group can make this up before the year-end. Encouragingly, the company has reiterated its own guidance around the impact foreign exchange rates will have on its bottom line this year. As such, the market still expects operating profits of roughly £395m.

But the reception to Mr Gobbetti – not to mention his decision to “elevate the brand” – has been lukewarm so far. Our hunch is that, as Mr Bailey intends to leave at the end of March, Mr Gobbetti is waiting for a new design chief to arrive before giving a more complete, ‘state of the union’ address to shareholders. It’s also worth remembering that the group has proved to be the master of reinvention before, and Mr Gobbetti’s track record in turning businesses around speaks for itself.

The problem isn’t that Mr Gobbetti is unaware of what needs to be done. Relying on a fast-reversing foreign exchange tailwind (the group earns a fair chunk of income outside of the UK) or a now-dwindling number of tourist shoppers in the UK isn’t a long-term strategy. Mr Gobbetti reckons the stores need a proper facelift to make the shopping experience match the price tag and that digital innovation needs to stay at the top of the agenda. Burberry has made a pretty good job of this in the past: it was one of the first luxury houses to live stream catwalk shows and recently made it possible for customers to shop brand-new ready-to-wear collections direct from the runway. That compares to the usual six-month time-lag between fashion show and store deliveries for most luxury retailers. Mr Gobbetti also wants product ranges to be simpler, more trend-led and focused on leather goods and accessories.

It isn’t totally out of the question that Burberry could be a potential takeover target. Luxury conglomerate LVMH (MC.) just announced record results, and last year spent £10bn acquiring a remaining stake in Christian Dior it didn’t already own. Jimmy Choo (CHOO) was also taken over by US group Michael Kors (US:KORS) last year on an enterprise value multiple of approximately 17.5 times 2016's adjusted cash profits and a 37 per cent premium – remarkable given the number of challenges that business faced. Choo's challenges aren’t entirely dissimilar to the ones faced by Burberry – a heavy dependence on Asian customers and an expensive store refurbishment programme are just two examples. LVMH could add a British heritage brand to its existing portfolio of companies, while close rival Kering (KER) is also debating selling its 50 per cent stake in British brand Stella McCartney. Could this make room for Burberry?