Can Reckitt and Burberry shares recover after disappointing 12-month performances?

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Can Reckitt and Burberry shares recover after disappointing 12-month performances?

The share price performances of global consumer goods companies Burberry (LON: BRBY) and Reckitt (LON: RKT) have been extremely disappointing over recent months. While the FTSE 100 has gained 10% in the past year, the two companies are down by around 4% apiece.

Clearly, both firms could continue to suffer from the economic uncertainty and internal challenges that have contributed to their share price falls over the short run. However, on a long-term view, their economic moats, growth strategies and an improving global economic outlook could catalyse their shares and lead to FTSE 100 outperformance.

Burberry

Burberry’s share price has been negatively impacted by the pandemic. Notably, travel restrictions and lockdown measures have curbed demand for its products over recent quarters. Further restrictions in these areas may act as a drag on the firm’s financial performance in the short run.

In addition, management changes may also have impinged on investor sentiment. Former CEO Marco Gobetti will be replaced by Jonathan Akeroyd in April after five years at the helm. Investors may be demanding a wider margin of safety due to the potential for a period of relative uncertainty with regards to company strategy.

Despite these ongoing risks, Burberry’s shares could be well placed for recovery. The company recently reported interim results that showed revenue has fully recovered to its pre-Covid level. Moreover, full-price sales are growing at a double-digit percentage and margins are expanding. As the world economy fully reopens following the pandemic, Burberry could be a major beneficiary of higher demand for luxury goods.

In addition, the firm’s increasing focus on sustainability and digital growth could place it in a strong position to attract a wider demographic of consumers. Indeed, Burberry reported a near-doubling of online full-price sales in the first half of the year alongside growth opportunities from a revised store format that is being rolled out throughout 2022.

Looking ahead, the company is due to deliver a 14% annualised rise in earnings over the next two years. Trading on a forward price-earnings ratio of 20, it seems to offer good value for money relative to many FTSE 100 stocks.

Reckitt

Reckitt’s share price has also been negatively impacted by macroeconomic events. Its latest quarterly update showed that rising inflation is causing higher input costs across its operations. This has the potential to squeeze margins, and profitability, across the sector.

The company’s recent performance has also been hurt by disappointing returns from its infant formula and child nutrition business in China. However, this unit has now been sold, as the company seeks to shift to faster-growing categories.

Moreover, Reckitt’s broad stable of leading consumer brands provides it with a relatively wide economic moat via a high degree of customer loyalty. This means it may be better protected from higher inflation than many of its sector peers, since it could have greater scope to raise prices in response to growing input costs.

Furthermore, the company’s investment in digital sales could add to its levels of customer loyalty and position it for long-term growth. Indeed, the firm’s e-commerce sales increased by 23% on a like-for-like (LFL) basis in the most recent quarter.

Trading on a forward price-earnings ratio of 20, Reckitt’s shares are by no means cheap. However, its plan to shift towards faster growing categories, long-term digital opportunities and a wide economic moat could make it worthy of a premium valuation relative to the wider FTSE 100.


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