This British fashion house is ready to take on Europe's elite

The association between Burberry and antisocial behaviour eventually became so strong that by 2004 pubs had reportedly started barring plaid-clad punters from entry. This did nothing to boost the brand’s luxury standing, with one commentator deeming its trademark check the “ultimate symbol of nouveau riche naff”. Even now, some two decades on, the pattern has not been fully rehabilitated in the eyes of the fashion world.

A version of this sneer appeared in a recent episode of the hit HBO drama Succession, in which the dysfunctional descendants of a media mogul vie for control of the family company. The hapless cousin Greg (the least likely successor in contention) brings an unwelcome date to patriarch Logan Roy’s exclusive birthday party. The young woman is quickly singled out for carrying a large handbag covered in Burberry’s trademark check – a sure-fire sign that she wants to appear wealthy but lacks the refinement of the show’s genuine elites. 

The depiction probably left Burberry executives wincing. But it hasn’t had the same effect on consumers. According to Google data, searches for the phrase “Burberry tote bag” rose by more than 310 per cent after the episode aired. The shares also went up by around 8 per cent in the following days, albeit this was also down to a general improvement in risk appetitie.

The company, Britain’s only global home-grown luxury fashion house, has historically underperformed among its peer group. However, the problem isn’t the lingering association with hooliganism. Rather – as the brand’s Succession cameo gestures towards – it’s an inability to gain a foothold in the most prestigious segment of the luxury market. 

Ultra-luxe ambition

Multiple chief executives have promised to take Burberry further upmarket and in doing so lift its margins closer to the heights of Italian and French competitors. In 2017, then-chief executive Marco Gobbetti announced it would stop selling its trench coats and handbags in certain department stores in a bid to make the brand more exclusive. Gobbetti also instigated a revamp of Burberry’s own stores before unexpectedly leaving the role in 2021.

His successor, Jonathan Akeroyd, changed tack somewhat, opting to emphasise the brand’s ‘Britishness’ while targeting a sales uplift from £2.8bn to £4bn in the next three to five years. “Burberry, of course, has trench coats and scarves, which are segments where the brand is very strong,” said Stifel Europe analyst Rogerio Fujimori. “But it needs to create more best-selling products, particularly in bags and shoes because [management] wants accessories to account for more than 50 per cent of sales, from 40 per cent currently.”

Founded in 1856, Burberry is decidedly a ‘heritage’ brand – which means it must balance its legacy products and image against a fast-moving trend cycle. When chief creative officer Riccardo Tisci joined in 2018, only around a quarter of Burberry’s sales were from newly-designed products. Management said earlier this year that the ratio is now closer to half. Tisci has since left the company, drawing criticism from some fashionistas who accused him of failing to make a statement with the brand’s shoes and handbags. His replacement, Daniel Lee, built a reputation for designing best-selling accessories with Italian label Bottega Veneta.

Some shareholders will no doubt feel unsettled by the recent churn at the top of Burberry’s management team. The latest appointment, chief financial officer Kate Ferry, joined from manufacturer McLaren Group last month. However, Fujimori argues that much of the necessary brand transformation work has now been completed, meaning new executives aren’t starting from scratch in their bid to shepherd the company into a new era. “[Burberry] has eliminated markdowns in its mainline stores, which is something that the best luxury companies do,” says Fujimori. “The entry-price quality shirt is nearly £400 and the price architecture of bags has been elevated substantially.”

Profitability problem?

Burberry is also likely to benefit from the post-lockdown reopening in China – the world’s second-largest market for luxury goods behind the US. Prior to the pandemic, two-fifths of the company’s sales were to Chinese consumers. The expected resumption of this long-term dynamic in 2023 recently led Deutsche Bank to forecast “sales growth in China and constant FX sales growth of 15 per cent”, which analysts said will “compare well to best-in-class peers such as LVMH (FR:MC)”. Burberry is due to report full-year results for the 52 weeks to 1 April next month.

Whether Burberry’s brand overhaul will eventually help it attain the healthy margins of rivals such as LVMH and Kering (FR:KER), which owns labels including Gucci and Yves Saint Laurent, is still a matter of conjecture. Sceptics might note that Burberry’s operating margin was just over 18 per cent in its last financial year – a slim improvement on the 17 per cent it achieved all the way back in 2017. In other words, its efforts to move upscale haven’t translated into greater profitability as yet.

Consensus estimates currently see annual revenue growth of around 6 per cent for Burberry, while the biggest luxury players are tipped to grow at double-digit percentages. Then again, shooting the lights out might not be required. “For the stock to do well, it’s about improving profitability and narrowing the gap with its best-in-class peers,” argues Fujimori. Still, while the transformation of the brand’s management team might be complete, the upgrade of its store network is not. Some 37 shops had been upgraded to reflect the brand’s new ultra-luxe identity by the end of Q3 2022. 

The company hopes to increase that number to 65 by the end of the current financial year, with all stores converted by 2026. Unlike other segments of the retail market, bricks-and-mortar shops remain key to the experience of buying luxury goods. This means brands such as Burberry will strive to create a unique experience for their wealthy customers. The luxury market also enjoys some degree of protection from macroeconomic shocks, meaning that these retailers don’t have to worry about upping prices in the way that, say, a supermarket does.

Burberry trades on a forward price/earnings multiple of 18 for its current financial year – versus the considerably pricier multiple of 27 for LVMH. Hong Kong-listed Italian fashion house Prada (HKG:1913) also trades on a comparable 27 times forward earnings. According to an informal industry poll by Bloomberg, Burberry is among the most likely takeover targets in high-end retail this year. With few other opportunities for UK investors to gain exposure to the resilient world of luxury retail, we’d argue that Burberry is fairly priced, even if its brand reinvention remains a work in progress.