Burberry has decent Q1 but overhang must clear

It was a solid quarter of trading at the luxury fashion firm which represents a strong base to build for the year. Our head of markets analyses the numbers.

Burberry Group (LSE:BRBY)’s strong momentum has carried over to its new financial year, with the economic reopening in China and the established return of the tourist providing a twin boost.

First quarter comparable store sales showed an increase of 18%, underpinned by growth of 17% in the European area. More tellingly, the Mainland China region which has been fairly central to Burberry’s fortunes saw a significant increase of 46%.

Of late, however, there has been something of an overhang on the shares given the faltering Chinese recovery, which has taken some of the sheen from Burberry’s recently reviving fortunes.

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By product, outerwear and leather goods continue to be star performers within the brand, with sales up by 36% and 13% respectively in the 13 week ended 1 July. While this shows some vindication to the group’s decision to eschew discounted products in favour of full-price sales, comparable numbers will become harder to emulate, which will mean that Burberry’s focus will need to remain laser sharp.

Indeed, there are few signs of any distractions as the group continues its intense charm offensive. Its innovative approach to marketing continues to keep the brand front of mind, boosted by a social media presence which involves many high-profile ambassadors and, for example, recorded 20.8 million views on TikTok.

In addition, Burberry will be boosting the profile of the Daniel Lee debut runway collection, which is due to launch in September and, in the meantime, the Summer Capsule launch has also attracted some favourable attention. The ongoing revamp of its physical stores also continues apace as the group seeks to remain relevant and to some extent edgy, and the reopening of its flagship store in New Bond Street, London, promises an “immersive” experience across all categories.

Apart from any question marks over the strength of the Chinese economy, Burberry is undergoing something of a quiet revolution at a time when other luxury brands such as LVMH Moet Hennessy Louis Vuitton SE (EURONEXT:MC) and Compagnie Financiere Richemont SA Class A (SIX:CFR) are consolidating their own leading positions.

There is an element of risk to this strategy, although some insulation is provided by the fact that the typical high-end luxury consumer tends to be rather less affected by the wider economic pressures of the day. The continued reinvention of the business also comes with an inevitable cost, although with revenues flowing through the door as evidenced in this update, the strategy is perhaps on track.

The balance sheet is also robust enough to withstand the current round of investment, while the commencement of the £400 million share buyback programme should be supportive to the share price. In addition, a dividend yield of 2.9% may be pedestrian but is well covered, while also providing some financial leeway for the group depending on how the rest of the trading year unfolds.

Burberry is maintaining its guidance for the year, clearly choosing not to extrapolate the strength of sales from the first quarter. The group has noted some uncertainty around the macroeconomic environment, while also expected currency headwinds of £150 million to revenues and £70 million to adjusted operating profit at prevailing foreign exchange rates.

Even so, it expects to achieve high single-digit revenue growth, with adjusted operating margin of around 20%, and with a medium-term revenue target of £4 billion in revenue becoming increasingly achievable.

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In all, this update represents a strong base for the year on which Burberry can build. The pace of growth, however, is one which investors will be keenly watching, particularly given any uncertainties arising in some of the group’s key regions.

The share price performance has been similarly turbulent, including a drop of 18% in the last three months, although despite this dip, over the last year the shares have added 27%, which compares to a gain of 5.7% for the wider FTSE 100 index.

For the moment, the signs are encouraging, but clouds need to clear, with the market consensus of the shares as a 'hold' reflecting lingering uncertainty on prospects.