Buy revitalised Burberry

It would be unfair to lay the group’s success solely at Mr Tisci’s feet. While new products accounted for 70 per cent of the total offering in stores at the end of September, up from 10 to 15 per cent in March, Warren Buffett’s adage that where good managers meet bad businesses, it is often the manager that loses their reputation, stands. Burberry is an established leader in luxury trench coats and scarves. Testament to its brand's strength are its strong record for return on capital employed and margins (see graph).

To increase sales and drive into new areas, such as leather goods, management has increased capital expenditure in recent years, from £110m in 2019 to an expected £180m in 2019. It is refurbishing its store network and improving its IT and its digital presence. However, solid operating cash generation means it has a comfortable net cash position – £670m at the end of September excluding £1.1bn of lease liabilities – in spite of capital expenditure and repeated share repurchase programmes. 

The group started last year buffeted by fears of slowing demand for luxury goods in the critical Chinese market, but these worries have now been set aside. While the protests in Hong Kong have severely impacted trading in the territory, Mainland China has been a standout performer, growing sales by “mid-teens” in the half-year results, the only region to report a double-digit improvement. 

In fact, China is the site of an interesting experiment for Burberry. Luxury companies have adapted to the rise of online retail by making their shops nicer to visit and using social media and ‘influencers’ to build their brand. Burberry is taking this one step further, partnering with Chinese tech giant Tencent to develop a “social retail” concept in the country. The initiative will begin in earnest with the opening of a store in Shenzhen. It is described in the fluffy terms typical of both luxury and tech companies as “creating digital and physical spaces for engaged communities to interact, share and shop”. More tangibly, Tencent’s clout as the owner of WeChat, China’s largest social messaging platform, makes this an interesting proposition.

As Burberry’s transformation has begun to build momentum, the luxury sector looks to be gearing up for consolidation. In late November, luxury giant LVMH (FR:MC) sealed a deal to acquire US jewellery brand Tiffany for £12.6bn, the largest acquisition in the group’s history. Investors saw this as an indication of increased appetite for dealmaking in the sector, sending luxury shares, including Burberry, up on the day. It may be tempting to write this off as a one-off, but just a few days later it emerged that French luxury conglomerate Kering (EPA:KER) had held acquisition talks with Moncler (BIT:MONC). The Italian skiwear company has a market capitalisation of €10.5bn (£8.8bn), within striking distance of Burberry’s £8.6bn. If the Tiffany deal is a signal M&A activity in the sector is heating up, Burberry’s strong financials, historic brand and strong position in China could make it an attractive proposition.