ii view: Burberry's big profits surprise

The pandemic had an impact but a transformation plan is now well established. Buy, sell or hold?

Full-year trading update to 31 December 2020

ii round-up:

In an unscheduled trading update, personal luxury goods retailer Burberry (LSE:BRBY) today flagged its expectations for full-year revenue and adjusted operating profit to be ahead of current consensus analyst expectations.

A strong rebound since December is now expected to see comparable fourth-quarter sales to the end of March up by between 28% to 32%.  

Burberry shares rose by more than 8% in UK trading, providing for a near doubling in the share price since late March 2020 pandemic lows. Shares for iconic sporting goods maker Nike (NYSE:NKE) have more than doubled to a gain of 125% over the same time. Shares for luxury watch retailer Watches of Switzerland (LSE:WOSG) are up over 200%.

A fall in revenue over the pandemic hit year of between 10% to 11% compares to a fall of 3% in the partially virus hit previous year. An adjusted operating margin of between 15.5% to 16.5% contrasts with current analyst estimates of under 14%.

Burberry operates 215 retail stores, 148 concessions, 57 outlets and 44 franchised stores. The initial early 2020 outbreak of Covid-19 in China hit its Asian business first. Subsequent lockdowns elsewhere in the world and a near halt to global tourism, resulted in Burberry’s first-quarter sales to the end of June 2020 almost halving. 

Given a better-than-expected sales performance, broker Morgan Stanley now forecasts adjusted profit of between £363 million to £391 million, compared to a consensus estimate of £313 million. 

In order to revitalise its iconic brand, Burberry prior to the challenges of the pandemic, commenced a multi-year transformation plan.

Full-year results are scheduled for 13 May. 

ii view:

Founded in 1856 by Thomas Burberry, today the company has become a global luxury brand with annual sales of over £2.6 billion. Launched in November 2017 under new management, its transformation plan continues. A drive towards digitalisation is ongoing, its stores are being revamped and for the most part it is exiting its non-luxury lines. It has also placed a greater emphasis on leather and accessories, areas it believes to be more resilient and faster growing segments of the luxury market.

For investors, East-West tensions regarding Hong Kong should not be forgotten. Taking both Asia Pacific and China together, the region accounts for around 40% of group sales. The dividend has also remained suspended given understandable cash conservation during the pandemic. But this latest update clearly reflects well on trading at Burberry. Sales recovery from the height of the pandemic is evident - full-price sales growth has been aided by a younger clientele under its digital social media drive. Digital full-price sales grew by more than 50% during the third quarter. In all, and while uncertainty from the pandemic is not yet past, longer term momentum may well have been re-established.  

Positives: 

• Transformation plan
• Pursuing a cost saving programme

Negatives:

• Coronavirus uncertainty
• Continuing China US tensions

The average rating of stock market analysts:

Hold