Burberry sales may buff its luxurious valuation

Burberry Group Plc., the British maker and purveyor of luxury glamour, will release full-year sales figures on Wednesday 15th April.

But it looks like investors have been distracted from guessing how many trademark fashionable goods, fragrances and cosmetics it sold in 2014/15, by the thinnest patina of takeover talk, sending its shares more than 5% higher over the last week.

M&A fever à la mode

Burberry has frothed along with a host of other blue-chips in a UK market that has bubbled with takeover speculation for about a fortnight.

In Burberry’s case, it looks like the rumour game started after a number of brokerage reports released earlier this month.

JPMorgan increased its target price on Burberry stock to 1560p from 1470p before, expecting the weak euro to help companies like Burberry sell more stuff in Europe.

JPM was less optimistic about one of the firm’s strongest erstwhile sources of custom, China, with tourists from there having fallen sharply in recent years.

Burberry was also included in a list of “conviction buys” published by Goldman Sachs, targeting stocks that are supposed to have an M&A probability of 30% or more.

Subsequent UK media reports last week suggested Burberry could attract the attention of a US rival, or cash-rich private equity groups.

The market was of course already primed for takeover talk, after a wave of unexpected M&A news earlier in the month: Fedex’s $4.8bn swoop on TNT, Shell’s £47bn deal with BG, and Mylan’s $29bn offer for fellow generic drug maker Perrigo.

Luxury valuation

In Burberry’s case, at least, these rumours are hardly new.

The company has long been seen, rightly or wrongly, as a takeover target.

Expectations had been raised 18 months ago when its share price tumbled on news of the resignation of its former CEO Angela Ahrendts.

But a cursory glance at Burberry’s innards suggests it would be better suited as a potential acquirer, right now, rather than prey, due to valuation.

Its share price, which is just 6% or so off its highest ever closing level, struck in February, could make it a relatively expensive acquisition.

Burberry is even trading at a premium to its giant peers, like LVMH.

The French company’s €98bn (£66bn) enterprise value dwarfs Burberry’s £7.5bn.

But consider that Burberry’s current market-price-to-book value is 53% higher than the European luxury sector average.

At the same time, this market premium is out of sync with forecasts of Burberry’s free cash flow (FCF).

The market is discounting Burberry’s free cash flow for the current year by 74% compared to a group of peers including LVMH, Richemont, Prada and Tiffany.

Burberry ‘Beauty Box’, Seoul, South Korea, March 2015

Sales momentum may eclipse FX drag

This isn’t to cast a pall over the firm’s next set of sales results, which are a major focus for European stock markets this week.

There’s a good chance Burberry’s sales will have maintained strong momentum, after it posted double-digit percentage comparable sales growth in the Americas, Europe and the Middle East in Q3.

Including Christmas sales, third-quarter group retail revenues rose 15% to £604m.

Burberry did say Asia Pacific growth was weak with a low single-digit percentage, primarily reflecting disruption caused by political protests in Hong Kong.

Additionally, BRBY expects wholesale revenues to be down by a mid-single-digit percentage in the six months to 31 March 2015.

In its Beauty segment though, Burberry sees wholesale revenues growing by about 25% at constant exchange rates in the current 2015/2016 year.

And it does not expect a material impact in the second half of FY 2015 from the currency headwinds that impacted the firm last year.

A consensus forecast compiled by Thomson Reuters combined with proprietary analysis suggests Burberry is set to report full-year 2014/15 revenues of £2.49bn-to-£2.54bn, 6.6%-to-9% higher than the year before.

The average forecast of revenues in the last half of the company’s fiscal 2015 is £1.39bn.

Adjusted for currency impact and other one-off factors, sales could look about 12% higher.

Q4 underlying retail sales are likely to be 12% higher, and up 7% on a like-for-like basis (counting only sales from stores open more than a year).

Some market views suggest Burberry may have got a tailwind from purchasing a higher proportion of cheaper euro-denominated goods, than during the fourth quarter of the year before.

Even so, it’s worth noting Burberry’s annual revenues have consistently underperformed market forecasts over the last five years, albeit usually by a few million.

Burberry’s final, complete results are scheduled for 20th May 2015.

A solid showing in Burberry’s final trading update for the year would probably froth up its shares again.

The market would probably push the stock back to strong support-turned-resistance that was laid down during the decline off Burberry’s all-time high.

That implies a modest rise of 3% from Wednesday’s close.

However, note the stock’s weekly beta over the last three years is 11% above the FTSE 100 average, according to Thomson Reuters data.