Why Burberry’s share-price surge could continue

Robert Stephens, CFA, discusses why fashion house Burberry may deliver further capital growth as it refreshes its offering.

Last week’s first-quarter trading update from Burberry (LON:BRBY) was warmly welcomed by investors. Its share price surged by around 18% following the news, with its refreshed strategy seeming to have the potential to re-energise its growth rate.

During the period, comparable store sales increased by 4%. In its biggest market, Asia-Pacific, the company’s comparable store sales increased by a high single-digit percentage as Mainland China posted strong growth.

Encouragingly, the response among customers to the company’s new collections has been positive. They will form a key part of its overall strategy, with them accounting for 50% of its offer in mainline stores. As this figure grows, the company’s overall sales performance could do likewise.

Changing customer base

Of course, a new collection under a refreshed design team is just one part of Burberry’s revised growth strategy. The company is pivoting towards higher-priced, luxury items where it believes it has a greater competitive advantage versus peers.

As part of this, the company is rolling out a new store concept that is aimed at improving the customer experience. It will also close a number of stores, while increasing the amount of fashion content that it stocks.

In addition, a sharper focus on social media could allow the brand to compete more effectively with rivals. It is evolving its influencer approach, while ensuring that its omnichannel experience is improved.

Evolving business

The company is set to deliver further cost savings as part of an overall drive to reduce complexity and improve productivity. It is investing in its supply chain and in functions such as IT and procurement in order to become increasingly efficient.

Although an increasing focus on environmental concerns may not have a direct impact on sales and profitability in the short run, Burberry’s goal for 100% of its products to have a positive social or environmental impact may align it more closely with rapidly-changing consumer tastes.

Threats

Clearly, the company is dependent on the growth outlook of the regions in which it operates. China, for example, remains a key market for the business. Its prospects appear to be uncertain due to its quarterly GDP growth rate recently falling to its lowest level in 26 years and an ongoing trade war with the US having the potential to impact negatively on domestic demand for luxury products.

Furthermore, Burberry’s forward P/E ratio of 28 suggests that investors are expecting a step-change in its profitability, with its valuation indicating that it lacks a margin of safety.

Outlook

While Burberry is forecast to record a rise in earnings per share of just 7% in the current year, its prospects over the long term appear to be more favourable. As the implementation of its strategy continues, it expects to post high single-digit revenue growth per annum, as well as a rise in its operating margin.


Therefore, it has the potential to become a stronger business that can deliver a significant improvement in financial performance over the long run. While it may not be a cheap stock, its first-quarter update provided an insight into its growth potential. This could lead to improving investor sentiment, as well as a rising share price.