Interactive Investor

Burberry shares within reach of record high after Q3 results

18th January 2023 08:32

by Richard Hunter from interactive investor

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It's one of the best performing FTSE 100 stocks over the past year, and there's enough in this update to keep investors interested. Our head of markets runs through the numbers.

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Despite an awkward economic backdrop, Burberry Group (LSE:BRBY) ploughed on during its third quarter with the innovative campaigns which are making the brand increasingly relevant to a new generation of customers.

In some ways, the higher end nature of the group’s products are aimed at customers who to a large extent are shielded from inflationary or even recessionary concerns. In addition, the strength of the US dollar has not only attracted more tourist spending in Europe from Americans, but has the added advantage of boosting earnings which become more valuable when repatriated.

Indeed, Burberry has estimated a currency tailwind of £160 million to revenues for the full year, and a £70 million boost to adjusted operating profit. Comparable sales in the European region grew by 19% in the 13 weeks to 31 December, and for the group as a whole – excluding Mainland China - by 11%.

The relaxation of the zero tolerance Covid-19 policy in China has yet to wash through to the numbers, and this could be an area in which Burberry gains significant advantage. Traditionally the group has reaped the benefit of Asian tourism spending, and the possibility of pent-up demand from locked-down consumers could well lead to a coiled spring effect which would complement the progress being made elsewhere.

The ability of the brand to remain visible and relevant is becoming increasingly important, and Burberry seems to be at the cutting edge of marketing innovation. Apart from the various pop-ups, social media heat and the use of influencers, specific campaigns such as one on Outerwear have had much success, as well as those for the festive and Lunar New Year periods.

The growth in retail revenues of 5% has also been made possible by double-digit growth in its important leather goods range, such as the Lola handbag offering which is still proving popular. Women’s ready-to-wear sales also increased strongly, supported by growth in dresses and knitwear.

At the same time, the brand is being refreshed further, with a transition of its stores to a new concept design, with another 65 due for conversion this year, and with the aim of completing the entire store estate by 2026. Those stores which have already undergone the revamp have seen higher revenues and productivity, and the full return of global tourism could well accelerate the trend.

Concerns will of course persist as the global economic environment remains uncertain, at best. By the same token, Burberry seems to be seeing the benefits of its geographical diversification, where the weakness in one area is compensated for elsewhere.

With the potential return of the Asian tourist, the share price has been quick to react, with a rise of 28% over the last year comparing with a gain of 3.8% for the wider FTSE100 index, and with a spike of 41% over the last six months. The market consensus of the shares as a 'hold' seems to be a cautionary wait and see approach, until such time as the full benefits of consumer spending can be unleashed in Burberry’s direction.

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