Burberry rockets, but can it hang onto gains?

by Richard Hunter from interactive investor |

Our head of markets analyses results to see if this share price rally is here to stay or a passing fad.

Burberry's (LSE:BRBY) recently chequered performance is being erased, as a very strong showing across the piece is enough to prevent pressure on margins tainting the entire outlook.

The main culprit for Burberry's additional cut to forecast gross margins is the current unrest in Hong Kong, an important market for the group. The fact that Hong Kong finds itself in a technical recession given the disruptions is a blow to Burberry's trading in the region, where it is more profitable than most. 

In addition, as the company continues its transformation, it has needed to discount prices on older lines more deeply, as well as ploughing more resources into investing in product quality. More broadly, the ramifications from Brexit remain unquantifiable and, given recent economic data, there are also signs that the economy in China is slowing as a result if the current spat with the US, another important market for the group.

Source: TradingView Past performance is not a guide to future performance

However, overall there are any number of positives emanating from the update. The Riccardo collections are being well-received and are contributing double-digit growth, the company is reinventing its retail offer with 70% now coming from new products, and the "brand heat" which Burberry has been chasing through social media is gaining traction, especially in China. 

This latter growth should also be bolstered by the exclusive partnership the company has announced with the technology giant Tencent (SEHK:700). Here, prospects are tantalising as the two companies combine to blend social media and retail in an effort to attract consumers in their droves. The increasing importance of engaged communities, especially in retail, could well play into Burberry's hands given the extra exposure.

In addition, revenues have improved by 5%, adjusted operating profit spiked 14% and beat expectations and the full-year guidance remains unchanged. The previously flat performance in the US and Canada is also improving, while China has been strong in the year to date, notwithstanding a potential slowdown to come. 

There is also net cash of £670 million after a small share buyback and the payment of the dividend, even if the yield of 2.1% is not a particular attraction.

The enthusiastic reaction to these numbers has improved a share price which had struggled recently given the Hong Kong situation, dipping 12% in the last three months. Over the last year, however, the shares remain comfortably ahead, with a 13% hike comparing to a 4.5% jump for the wider FTSE 100 index. 

It now remains to be seen whether this exuberance translates to the market consensus, which has recently declined to a 'sell' given the wider political unrest.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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