Burberry scrubs up well for July

Investors are welcoming confirmation that Burberry’s cost savings plan is on track, but most attention is focused on the arrival of its new CEO in July.

Investors are welcoming confirmation that Burberry’s cost savings plan is on track, but most attention is focused on the arrival of its new CEO in July.

After a moderate start of £20m delivered in the year just ended, £50m is confirmed as the goal in the current 17/18 year with £100m annualised savings by 2019. Taxed and capitalised between 2016/17-2020 the scheme suggests about £200m of value (Net Present Value) assuming the annualised savings of at least £100m kick in as planned by FY 2019. That fits well with a satisfactory increase in free cash flow to £465m from £274m over the past financial year. We believe the average investor expectation was around £300m; another example of the somewhat overdone pessimism on the group that still lingers. 

It also certainly helps that adjusted profit before tax, at £462m is £41m higher than in FY 2016, broadly matching the group’s expectation that the outcome would be at “FY 2016 rates”. What scepticism there is on Burberry is predicated on the widely held assessment that its businesses are not adapting to the changing global environment as nimbly as peers and that this is at the root of the British group’s underperformance of continental rivals. It’s also clear that positive momentum from sterling weakness—particularly in, and from China—has a sell by date. The advantage will fade as sterling’s slow recuperation takes hold. (We’re already seeing something like this dynamic in the states). At least there were no new negatives reported in the APAC regions, and Wholesale and licensing challenges remained broadly as recently reported. Some disquiet is possible however, from new issues that emerged in H2 from transitioning Beauty into the partnership with Coty. An unexpected £18.6m more has been written down as sales unexpectedly flagged. 

Overall though, whilst still not entirely convinced that the uprating over the last 18 months is quite justified by the level of growth Burberry is comfortable to project over forecast horizons, we’re inclined to agree that the group has turned a corner. One cautionary thought is that it’s possible some investors continue to position for potential M&A, possibly with Coach Inc., as recently reported, which is not part of our main case. The main positive takeaway from Burberry’s year in our view is that the business has been scrubbed up to almost an optimum state, under current circumstances, in readiness for the official entrance of Marco Gobbetti as CEO in July. Expectations of his capability are clearly founded on the double-digit sales growth trends at LVMH’s Céline under his watch. Assuming, out of caution, just half of that is achieved at Burberry, it would still be better than the stagnation since 2014.

• Burberry shares have continued to confound the bears with a 14% rise so far this year and an impressive run of some 60% at its best since last June's Brexit vote. Yet from a technical perspective scepticism is also evident
• A range expansion is evident between the year’s peak in mid-March at 1838, and that expansion was clearly to the downside, after the shares broke out of the narrow channel in place since June 2016 (see black square on chart below)
• That said support at the year’s low of 1535p was confirmed in April and a classic bounce following a retracement to 61.8% of the decline from BRBY’s all 1929p February 2015 all-time high suggests the balance of market sentiment is healthy and orderly 
• Buyers should though, in our view, become warier if Burberry’s near-term limit fails to reach the underside of the lower bound of the channel we mentioned which was of course rising trend resistance, and a solid one at that since June 2016
• The stock did manage to close just 0.6% off Thursday’s high, having completed the ‘gap-fill’ left from a nervy spike in thin volume on 19th April, the day of Burberry’s second half trading statement, released just a month ago
• We would expect buyers’ concerns to grow if a reversal in the near-term took the stock through the consolidation between £1590p-£1645p marked on our chart by a blue square that occurred between 19th April to date


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