Burberry shares priced for luxurious execution

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.