Burberry shares hit by falling US luxury consumption

When viewed in isolation, Burberry’s (BRBY) latest annual results look straightforwardly good. Revenues, profits, margins and free cash flow all improved on the previous year. As of the fourth quarter, sales had returned to growth in China following the end of pandemic restrictions. 

Investors seem to have plenty to feel satisfied with – so why did Burberry’s shares fall by more than 6 per cent on the morning of its results announcement? 

The answer can partly be explained by its performance relative to best-in-class peers in the luxury segment. LVMH (FR:MC), the French conglomerate that owns Dior and Louis Vuitton, posted sales of €79bn (£69bn) for 2022 and profit of more than €21bn – both up 23 per cent. Burberry’s rate of growth seems modest by comparison.

Then there’s the issue of retreating demand in the US – where sales fell by 3 per cent across the year and 7 per cent in the fourth quarter. Management noted that pressure was greatest on the label’s entry-level items. “This is likely to be taken as a confirmation that more aspirational brands are coming under more pressure amid slowing US consumption,” wrote UBS analysts in a note. 

The global luxury market is known for its resilience to economic shocks, meaning that a sustained slowdown in the US isn’t likely to send profits plummeting at Burberry (or elsewhere). 

With the shares currently trading on a forward price/earnings multiple of 18 times for 2024, we’d argue that Burberry is good value among its peers. Its growth may not be as stellar as the likes of LVMH, but we think this relatively moderate expansion is enough to be enthused about. Buy.

Last IC view: Buy, 2,586p, 5 April 2023