The FTSE 100 may have reached an all-time high this year, but there are still companies which have underperformed. For instance, Burberry (LON:BRBY) and Whitbread (LON:WTB) have declined by 7% and 10% respectively in the last month.
While there is scope for further share price declines in the short run, the two companies seem to have the right strategies to deliver improved share price performance in the long run. They could also provide diversification at a time when the UK economy faces an uncertain period. Therefore, for investors seeking turnaround opportunities, both stocks could be worth buying.
In Burberry’s case, it has now set out on a path of change which will see the company focus to a greater extent on higher-end products. This shift towards luxury opportunities includes a range of actions, from the potential closure of a number of stores to more innovative, higher price-point items. This could allow the company to move into a more premium price point over the medium term, which may benefit sales and margins.
Whitbread also seems to be shifting its strategy to some degree. While less obvious than Burberry’s pivot, the company now appears to be grasping the international growth opportunities for its Costa and Premier Inn brands. For example, it recently purchased the remaining 50% of its South China Costa joint venture. This will provide it with more control over future direction in what may be the most lucrative market for coffee in the long run. Similarly, Premier Inn’s foray into Germany has picked up in pace and this could provide it with additional growth over the medium term.
Efficient, international growth
Both stocks are focused on delivering growth outside of the UK. This could enable them to access higher growth rates than in the domestic market – particularly since the two companies have exposure to potentially fast-growing markets such as China. International exposure may mean they benefit from a weak pound, since interest rate rises look set to be slow and steady. Furthermore, uncertainty regarding Brexit may build as the March 2019 leave date draws closer.
As well as this, the two companies are seeking to become increasingly efficient. For instance, Whitbread has already delivered £60 million in efficiencies. It is on track to meet its target of £150 million in savings over the long run. Burberry is aiming to record cumulative savings of £100 million by the end of 2019, and has already delivered £40 million in cumulative savings. Greater efficiency may provide a boost to margins in future years.
With market sentiment towards both stocks being weak, further share price falls could be ahead in the short term. However, in the long run there could be turnaround potential. By focusing on becoming more efficient and zeroing in on what may prove to be more attractive growth opportunities, Burberry and Whitbread may be able to deliver improved financial performance. While the FTSE 100 continues to trade close to its all-time high, they may offer relatively appealing risk/reward ratios for the long run.
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