Interactive Investor

Will Burberry be rewarded for demonstrating real progress?

18th May 2022 09:50

Richard Hunter from interactive investor

Despite putting in some good numbers, shares in the upmarket fashion chain are trading close to an 18-month low. Our head of markets tries to make sense of it all.

Burberry (LSE:BRBY) has had a chequered recent history, partly for reasons out of its control, but these numbers underline the vigorous efforts the company is making to return to former glories.

The company is committed to maintaining the brand as relevant, appealing and unashamedly high-end. Indeed, the decision to exit non-luxury items and discounting is already bearing fruit as the company enters the acceleration phase of its strategy. Full-price sales in the US have almost doubled since pre-pandemic and, despite the recent headwinds resulting from lockdowns in mainland China, the region has seen growth of 54% in that period also. Overall, comparable full-price retail sales have risen by an impressive 24%.

The sustained and innovative promotion of the brand is being achieved through a mixture of physical events and use of social media channels, where Burberry is becoming increasingly popular with an engaged younger audience. This bodes well for future profits given the allure of the brand and the exclusivity on which it depends.

The numbers themselves also show signs of real progress. Revenues are up by 21% on the previous year, with operating profit rising to £543 million and above expectations of £526 million. At the same time, and despite continued investment in the business which has seen operating expenditure rise by 19%, the adjusted operating profit margin has increased to 18.5% from a previous 16.9%. The fact that the business is able to pass on price rises, coupled with the increase in full-price sales, has underlined Burberry’s ability to withstand most inflationary headwinds, given the nature of its consumers.

The increase to the dividend is also a sign of the company’s confidence in prospects, and the projected yield of 3.7% is an attraction given the current interest rate environment. The announcement of a £400 million share buyback programme is further evidence of a company with a strong financial position consolidating a strong brand.

Even so, the market has chosen to hone in on a number of factors for which there is no immediate respite. The recent and unexpected change of the chief executive officer was seen as potentially upsetting the momentum which the previous incumbent had installed, although only time can be the judge of measuring the success of the new order. The lockdowns in China have inevitably had an impact on performance in the final quarter, even though the general direction of travel remains strongly positive. In addition, the eventual return to full tourism seems some way off, which continues to punch a hole through revenues, particularly in Europe, which had previously reaped the benefit of visiting Asian consumers.

As such, the share price has struggled of late, having dropped by 24% over the last year, as compared to a gain of 7% for the wider FTSE 100. The underperformance has also taken the shine from performance over the longer term, such that the shares remain down by some 12% over the last three years and by almost 4% over the last five.

Burberry is clearly making progress on its ambitious strategy and there are some factors such as the full return of the tourist which should provide some serious tailwinds in due course. In the meantime, however, it seems that investors are not yet fully committed to the recovery story, and the market consensus of the shares as a hold reflects the challenges which are yet to be overcome.

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