Burberry shares priced for luxurious execution

Burberry investors have more reasons to hang on, but their patience will soon be tested

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.


Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (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.