Interactive Investor

Burberry's revival celebrated with profit taking

18th May 2023 08:41

by Richard Hunter from interactive investor

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A lot of good news was already factored into the fashion firm's share price, and investors are taking an opportunity to bank profits. Our head of markets explains. 

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      The return of the tourist and the economic reopening in China have provided a twin boost to Burberry Group (LSE:BRBY)’s reviving fortunes.

      The zero-tolerance Covid-19 policy had been a thorn in the side for Burberry’s comparable store sales in mainland China, which fell by 35% in the first quarter and by 23% in the third. However, the much expected improvement in the final quarter ended 1 April resulted in growth of 13% which, compared with a generally strong contribution from Asia and Japan in particular, led to net growth for the year.

      At the same time, the return of the tourist had a particular impact in the Europe, Middle East, India and Africa (EMEIA) region, where comparable store sales grew by 27% in the fourth quarter as tourist numbers doubled in the period. For that region, share of mix from tourists increased to over 40% of total sales, as compared to the number of under 25% the previous year. As such, comparable sales for the group as a whole increased by 16% over the year.

      By product, the leather and outerwear lines continue to be star performers. Leather sales, driven by the ongoing popularity of products such as the Lola handbag offering, grew by 12% over the year and by 15% in the last quarter.

      Meanwhile, outerwear sales grew over those periods by 7% and 30% respectively, with the final quarter boost notable for the revitalised interest in the iconic Burberry trench coat, which made its initial appearance during the First World War.

      As such, the key metrics show a healthy level of growth across most products and regions, leading to revenues of £3.09 billion for the 52 weeks ended 1 April 2023, in line with expectations and ahead of the previous year’s number of £2.83 billion. Adjusted operating profit was well ahead of the expected £621 million and came in at £634 million, a jump of 21% from £523 million the year previous.

      The group’s previous decision to return to full-price rather than discounted sales also continues to bear fruit without a notable impact on volumes, with the operating profit margin rising to 21.2% from 19.2% and representing further proof of the wherewithal of the typical Burberry customer.

      The strength of the numbers has also allowed an increase of 30% to the dividend, although the projected yield of 2.4% remains relatively pedestrian. Even so, further financial largesse was announced in the form of a £400 million share buyback programme, to be completed during the current financial year.

      Nor does the group intend to rest on its laurels as it seeks to maintain this momentum. The appointment of a new Chief Creative Officer has shown early promise, with a successful debut runway show adding to a new brand aesthetic. At the same time, the group remains committed to innovative and visible marketing campaigns, which capture the zeitgeist of high fashion and appoint ambassadors who are currently high profile in social media circles.

      The group is cautious on the immediate economic outlook, although its guidance remains unchanged, with a nearer-term revenue target of £4 billion and the further refurbishment of full-price stores, which has already had a positive impact on profits given their fresh appeal. The group has also seen the benefits of its geographical diversification, allowing certain regions to pick up the slack when other economies may be slowing.

      The initial market reaction to the numbers reflects the high expectations which investors had going into the results. At the same time, the recently strong performances from the likes of LVMH Moet Hennessy Louis Vuitton SE (EURONEXT:MC) and Hermes International SA (EURONEXT:RMS) provided a major clue to high-end retailers’ fortunes at present, such that there will be a strong element of profit taking within the opening share price dip.

      By way of context, this follows a share price hike of 59% over the last year, as compared to a gain of 3.8% for the wider FTSE100. Burberry’s clearly improving fortunes could also prompt upgrades to the current market consensus of the shares as a 'hold'.

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