Burberry ‘optimal opportunity for investors’ as turnaround gains steam
Analysts have labelled Burberry’s share ‘undervalued’ as the brand’s plan to turn its back on a rocky year gains steam.
The FTSE 250 firm reported a major improvement in half-yearly sales on May 14 – although it wasn’t quite enough to stop the company falling into an operating loss for the financial year.
Sales fell 20 per cent in the first half of the year but improved to a five per cent contraction in the second half, with particular gains in Europe and America.
Burberry said it has seen “significant progress” with its turnaround plan, Burberry Forward, launched last November.
Analysts were almost uniformly upbeat about the brand’s prospects, which they’d been panning as recently as last Autumn.
“We like the marketing refocus on products where Burberry’s brand is the strongest and most differentiated – its outerwear and scarves,” Morningstar senior equity analyst, Jelena Sokolova, said.
Sokolova compared Burberry’s strategy to Pandora’s successful turnaround, which started in 2018-2019 and re-centred the brand on its classic pieces.
Burberry shares spike on half-year boost
Burberry’s share price rose 18 per cent on May 14 as investors cheered a strong second half, meaning its share price has risen more than 12 per cent in the last six months.
“Although shares are up, we believe that they remain undervalued in five-star territory, providing an optimal opportunity for investors,” Sokolova said.
The company’s share price cratered more than 70 per cent last year, pulling it out of the FTSE 100, after an unexpected CEO change and suspended dividend in the face of a wider slowdown in the luxury sector gave investors cold feet.
Barclays rated the stock ‘underweight’, and analysts argued that the brand had become adrift in the market – its performance “a symptom of the brand losing sight of what it stands for”, according to one strategist.
Kathleen Brooks, analyst at XTB, added that the market is “cheering” Burberry’s restructuring plan, along with its “stronger than expected sales”.
The company aims to save £100m over the next year via a combination of cost efficiencies and staff cut – it will cut around twenty per cent of its work force – and re-invest the money into its brand.
Its turnaround plan has seen the company attempt to reconnect with its roots – or, “restoring a culture of creative and commercial alchemy rigorously focused on our customer”, in its own words.
Brands deals with stars Barry Keoghan and Olivia Colman have been inked, tartan bikinis have made their way back to shopfronts, and films starring Kate Winslet and Nicholas Hoult have been shot.
“[Burberry] are finding their way with the new strategy based on outerwear,” strategy professor Stéphane JG Girod said. “It could be very effective.”
Uncertainty in the luxury sector
That’s not to say that it’s plain sailing for Burberry from here on out.
The sector is still plagued by slow demand for ‘loud luxury’ in China, as well as a contraction in its middle-class consumer base due to price spikes during the post-pandemic boom.
“[Price rises are] really up to a point, and I think that people are factoring in the vacuum they get for the increasing sums that they’re asked for, and they see there’s no justification for it,” Girod said.
“[Big brands] have largely overstretched to the point of becoming banal and commoditised,” he said, adding that unlike the big players, independent brands have the opportunity to evolve with being constrained by their own design history – something which might make it harder for Burberry to grow by trading on its roots.
Tariffs, too, complicate matters – most firms are relying on America to boost profit this year – as does the rise of independent challenger brands.
“There is a great deal of uncertainty in the luxury goods sector, with the likes of LVMH and Kering seeing only modest recoveries in their share prices in recent days as the orange smoke starts to clear,” Nick Hawkins, retail analyst at Edison Group, said.
“The threat of tariffs might be receding but the fear of their damage to top-end consumer spending hangs in the air.”