Market News & Analysis
Burberry shares priced for luxurious execution
Ken Odeluga May 16, 2018 10:45 AM
Burberry has given investors further reasons to stay patient, though a 2% rise in full-year profit provides little evidence that CEO Marco Gobbetti’s suitably expensive strategy is gaining traction. To be sure, a small outperformance relative to expectations is nice to have. It could even be an encouraging signal from the plan Gobbetti embarked upon in November. Whilst acknowledging that the "task of transforming Burberry is still before us", he appears satisfied with the group's progress thus far, according to a statement with the group’s full-year report. Still, it is early days. Burberry’s full-year adjusted operating profit of £467m at constant currency rates is an advancement against the £459m it made in the 2017. But with gross margin creeping 50 basis points lower and £44m in new cost savings, it’s clear the £8m profit rise owed more to discipline than growth. Indeed, Gobbetti’s clear-eyed view is that there may not be much growth to speak of before 2021. Yet investors have lifted the stock about a quarter above long-term intrinsic valuation, including a 2.4% rise at the time of writing. True, this is a pattern frequently seen in the upper-bracket of the discretionary sector. On that basis though, Burberry currently trades at a premium to rival purveyors of finery like Richemont. The Swiss group’s market value is almost five times the size of its UK rival’s in dollar terms, and it is expected to grow at about 10 times the pace of Burberry over five years. The latter’s cash flow, which it has generated at a steady rate above £400m per annum in recent years, helps explain the market’s tolerance. Allocation of much of that cash to additional shareholder reimbursements is one reason why investors have held on. Despite management and economic travails of the last two years the stock tacked on about 60% during that time. The new cash-return plan of £150m, announced on Wednesday, is lower than the £355m one of the prior financial year. It will be completed in 2019. By that time, margins are destined to have shrunk further as a 50% hike in capex kicks in, aiming to vault Burberry up to even more rarefied air in the world of Haute Couture, Jewellery, cosmetics and accessories. The growth plan will be two years away from bearing fruit. Admittedly, lower buybacks need not trigger a de-rating for the stock. But with shares already priced for perfect execution the risk of shareholder disappointment is rising.
From time to time, GAIN Capital Limited’s (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.