Burberry share price overreaction has a longer-term point

Burberry had another strained quarter, but the stock fell as much as 8%. Overreaction?

Another strained quarter

Burberry had another strained quarter. Was it poor enough to warrant sending as much as £640m of share value up in smoke on Wednesday? We doubt it. The decline looks like an overreaction to the group’s 2% retail sales fall. Down £16m against the same three months in the year before, Burberry has had better quarters. But Q3 left the group just £572m short of year-end sales projected at £2.23bn by March. Little wonder Burberry has calmly reiterated conservative operating profit guidance. The market’s own view of about £395m also remains reasonable. That would equate to 81 pence per share or £317m in attributable income. The group would need to have reported the emergence of near-catastrophic conditions in Q3 to post the net loss of almost £200m signalled by the shares today.

Outsized disappointment

Outsized disappointment explains the outsized share price punishment relative to likely earnings performance. It does seem as though some investors expected star quality—in CEO terms—to become evident soon after the storied former Céline exec Marco Gobbetti joined in July. High hopes were stoked by the long spells of double-digit sales growth he oversaw at the LVMH-owned house. As Burberry sales continue to ebb, some investors may feel like they’re being served a performance worthy of the ‘B-listers’ hired to launch recent Burberry events instead. Hopes of almost immediate traction were of course unjustifiably high. Note the stock was spirited almost 20% higher between early July when news of Gobbetti's appointment emerged and the group’s poorly received strategic review on 8th November. As the reality sets in over how long Burberry will take to ditch a flat-footed approach to digital, a sub-optimal franchising structure and an ever-nimble upmarket consumer base, disappointment thrashes the shares.

Watch Gucci

It’s tempting to see such angst as now having been expunged, leaving a firmer path for the stock this year, so long as Gobbetti has no further surprises in store. A major problem with this scenario though is that Burberry’s closest large competitor Kering-owned Gucci is widely expected to see continued strong organic growth after a 44% jump in 2017. That points to some market share loss being crafted into Burberry forecasts for 2019. The group’s current state of low-gear flux leaves it exposed to better co-ordinated rivals over the longer term.

Share price points

Wednesday’s stock dump dropped the price definitively below its always closely watched 200-day moving average for the first time in 2018. The stock has been struggling to avoid such a move since last July. A gap of unfilled offers all the way up to Tuesday’s 1772p close may see some play. But we would still expect the downside to attract over the medium term, targeting prices at least as weak as 11th July’s 1580p. That is near a more reliable support at 1567p.

Burberry Group Plc. share price chart - daily intervals

Source: Thomson Reuters and City Index

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.