- There will be a reduction in markdown activity, a decision that will mainly impact its third quarter
- Weak tourism levels continue to hamper key markets
Burberry (BRBY) expects revenues to take a hit in its second half after opting to reduce the amount of discounting applied to its garments and accessories. The luxury marque explained the decision by saying that its brand is “resonating and attracting new and younger consumers”.
Burberry, like other high-end fashion brands, has been impacted by the collapse of international travel – a key source of income to the luxury industry. Around a half of European luxury custom depends on international buyers, according to Third Bridge estimates. Burberry has been particularly affected in Europe, the Middle East and key Asian markets such as Japan by the travel slump. With nearly two-thirds of its stores shut across the world in April, the company recorded a £45m free cash outflow, compared with a £29m outflow over the first half of FY2020.
Burberry did, however, experience a double-digit resurgence in mainland China, South Korea and the US in its second quarter, with the changed sales mix precipitating a 90 basis point increase in the gross margin. Margins also benefited from reduced charges for inventory provisioning. A credit of £58m in coronavirus adjusting items, including rent concessions, offset its £22m in restructuring costs linked to the reorganisation of Burberry into three new business units, a revamp that Burberry hopes will help the company focus on improving the quality of its products.
Consensus earnings forecasts are for earnings per share of 42.33p for March 2021, rising to 62.41p in FY2022.
The reversal of price rises and the expectation that the travel slowdown will last the rest of Burberry’s financial year could culminate in a fairly ugly outcome for the company’s full-year results. The shares trade at 27 times 2022 consensus earnings forecasts, which is difficult to justify when compared with historical multiples, particularly given that all-important travel volumes aren’t expected to resume until at least 2024, according to the International Air Transport Association. We move to hold.
Last IC View: Buy, 1,487p, 15 Jul 2020
BURBERRY (BRBY) | ||||
ORD PRICE: | 1,658p | MARKET VALUE: | £6.7bn | |
TOUCH: | 1,657-1,658p | 12-MONTH HIGH: | 2,340p | LOW: 1,017p |
DIVIDEND YIELD: | nil | PE RATIO: | 307 | |
NET ASSET VALUE: | 315p | NET DEBT: | 43% |
Half-year to 26 Sep | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
2019 | 1.28 | 193 | 36.6 | 11.30 |
2020 | 0.88 | 72.8 | 12.2 | nil |
% change | -31 | -62 | -67 | - |
Ex-div: | na | |||
Payment: | na |