Interactive Investor

Results prove recession-proof Burberry is class act

17th November 2022 09:49

Richard Hunter from interactive investor

Targeting richer customers is paying off for the luxury fashion firm. Our head of markets explains why.

    Burberry Group (LSE:BRBY) is taking the bull by the horns and continuing with an ambitious strategy which is showing some early signs of success.

    The company had previously switched largely away from in-store discounts and ties with non-luxury partners, unashamedly positioning at the high end of the market. This is already bearing fruit, underpinned by a typical customer perhaps less susceptible to the ravages of inflationary and even recessionary environments.

    At the same time, the shares have more recently been boosted by an easing of Covid-19 lockdowns in China, a strong read across from other luxury retailers such as Richemont, and a tailwind from a weaker sterling which has boosted revenues on translation.

    Half-year operating profit increased by 27% to £263 million from the previous year, ahead of expectations of £230 million, while revenues grew by 11% to £1.35 billion, also beating projections of £1.32 billion. Operating profit margin has also begun to reflect the move towards full-price sales, rising from 17.1% to 19.5%, with gross margin now in excess of 70%.

    Burberry’s ability to inject excitement and innovation to the retail space remains unchecked. The more recent campaign around its Lola handbag range saw sales of comparable leather goods rise by 11% over the period, with a particularly strong second quarter growth of 15%. The new outerwear campaign comes with similar hopes, and adds to the company’s ambitious next phase of its strategy. Burberry has its sights on a raft of growth measures including, but not limited to, doubling sales of both leather goods and e-commerce revenues.

    Such revenue generation has enabled the further rollout of rejuvenated stores which will continue for the next few years at least. In terms of shareholder returns, the previously announced £400 million share buyback programme has been bolstered by another increase to the dividend, which is now on a projected yield of 2.6%, which is more of a symbolic gesture than an obvious invitation to income-seekers.

    Of course, the company is mindful of increasingly fragile consumer sentiment given the global economic backdrop. Comparable retail sales growth has tended to echo these wider concerns. 

    The easing of Chinese restrictions has yet to wash through, leaving sales down by 4% in Asia over the period, and in the US a decline of 3% is reflective of some slowdown. Even so, US sales are ahead by over 30% compared to pre-pandemic levels, showing Burberry’s increasing encroachment, while the balance of group sales emanating from the likes of Europe and the Middle East rose by 34% in the half-year, with tourism growth which doubled in the half-year propelling revenues.

    Burberry is now at an inflection point in investment terms, and there is little doubt as to the scale of its ambitions. 

    The share price has been bolstered of late to stand 2% higher over the last year as compared to a marginal rise of 0.8% for the wider FTSE100, which is a creditable performance given the circumstances. Recent momentum has also seen the shares recover some previous losses as the price spiked by 27% over the last six months. 

    On balance, and given any sort of tailwind from an improving economic environment, the strategy could accelerate growth substantially. In the meantime, the profile of the group’s customer base and the strength displayed in this latest update could well prompt upgrades to a market consensus which currently stands at a 'hold'.

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