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Burberry: Good Progress, Competitive Multiples

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Luxury Retail Store Hong Kong Airport

Burberry, the British luxury fashion company (OTCPK:BURBY), has shown consistent progress despite recent market fluctuations. While the stock has experienced a minor decline of 2.6% over the past five months, this is in line with expectations. Despite the short-term correction, Burberry’s medium-term outlook remains promising, warranting a Buy rating.

The company’s latest performance further strengthens this positive outlook. To understand its current position, let’s recap where Burberry stood in my last assessment.

Recap of Previous Performance

For the fiscal year ending April 1, 2023 (FY23), Burberry reported a 7% year-on-year (YoY) increase in same-store sales, with a notable 16% jump in the final quarter driven by China’s recovery. Revenue growth of 10% in reported terms was commendable, although it lagged in constant currency. The company achieved an operating margin exceeding 20%, even amid high inflation, thanks to efficient cost management.

Income Statement

Looking ahead, Burberry targets a GBP 4 billion revenue in the medium term, implying 9% annual growth through FY26. FY24 is anticipated to see even higher “low double-digit growth.” The company aims to sustain an adjusted operating margin of 20%.

Recent Progress

Burberry’s new creative designer, Daniel Lee, has proven to be instrumental in driving the company’s success. The recent release of his latest collection received positive reviews, raising expectations for improved sales performance. The Q1 FY24 results, ending on July 1, indicate Burberry is on course to meet these expectations.

Financials

YoY same-store sales grew by 18%, supported by a remarkable 46% increase in mainland China. While the Americas market experienced an 8% decline, Europe demonstrated resilience, albeit with a slight softening compared to FY23.

Outlook for FY24 and Market Multiples

The forecast of “low double-digit growth” indicates a potential easing of revenue growth in the coming quarters for FY24. Conservative estimates suggest no more than an 11% reported growth for the full year. Additionally, the net margin is projected to remain at FY23 levels of 15.8%.

These projections translate to a competitive forward price-to-earnings (P/E) ratio of 13.6x. While slightly lower than analysts’ estimates of 15.5x, it is also lower than the consumer discretionary sector’s P/E ratio of 15x. Considering Burberry’s resilience as a luxury brand in a slowing economy, a modest premium seems justified.

Furthermore, Burberry’s trailing twelve months (TTM) GAAP P/E ratio stands at 16.3x, lower than the previous assessment of 18.3x and below its historical average of 23.4x.

Factors Limiting Burberry’s Performance

The stagnation in Burberry’s stock price needs to be understood within the context of the broader luxury sector. A comparative analysis with high-end luxury fashion companies such as Hermès (OTCPK:HESAY), LVMH Moët Hennessy (OTCPK:LVMUY), and Ralph Lauren (RL) reveals Burberry’s relatively weaker stock performance.

Price Returns

These stocks have all shown lackluster performance over the past six months, with Burberry underperforming even though its financials remained strong. External factors such as macroeconomic uncertainty are likely contributing to this stagnant price movement. Weak luxury sales in the US market, along with potential slowdowns in the US and European markets, pose significant challenges. Concerns about China’s market stability also add to the risk factor, despite its overall growth prospects.

Future Prospects

Despite the risks and current market conditions, Burberry’s financial performance remains robust. The company’s FY24 outlook is promising, even considering potential softening in the upcoming quarters. Moreover, with its operating margin already surpassing medium-term targets in FY23, Burberry stands to generate favorable profits. Ongoing declines in inflation and effective cost management may further expand its margins.

Furthermore, Burberry’s market multiples compare favorably, with its forward P/E ratio lower than that of the consumer discretionary sector. Given the luxury segment’s resilience during economic downturns, it is reasonable to expect a premium for a stock like Burberry. Additionally, the TTM P/E ratio is below historical averages.

Although short-term weakness may persist, now could be an opportune time to invest in Burberry considering its medium-term prospects. The company’s recent progress only bolsters the previous Buy rating. Therefore, I reiterate a Buy recommendation for Burberry.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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