Shares in the British luxury fashion brand Burberry (BRBY) are down substantially after the luxury brand issued a profit warning and suspended its dividend. Morningstar today adjusts its Fair Value Estimate for shares in the company.

The company, renowned for its iconic camel trench coats, has also replaced chief executive Jonathan Akeroyd. At the opening of trading yesterday, shares in the company, which is a constituent of the FTSE 100 index, fell 16.73%. They are currently down 47.5% since the beginning of the year, and are trading down 1.4% this morning.

Akeroyd will now be replaced by Joshua Schulman, who was formerly the chief executive of luxury bag and shoe brands Coach and Jimmy Choo. Akeroyd has been in post for just two years. Schulamn said he was "deeply honoured" to take the helm of the company. 

"Burberry is an extraordinary luxury brand, quintessentially British, equal parts heritage and innovation," he said.

Why is Burberry's Share Price Down so Much?

Burberry is among the luxury retailers experiencing a slowdown in sales amid a wider contraction in certain areas of luxury spending across the world.

The British brand's sales in the Asia Pacific Region dropped 23%, while sales in mainland China and the Americas also fell 21% and 23%, respectively.

In Europe yesterday, Zurich-listed watch maker Swatch (SWGAY) suffered a 10% share price fall after it revealed a 70% drop in operating profits in the first six months of 2024. The company owns iconic watch brands like Omega and Blancpain.

The Morningstar View 

Morningstar has reduced its Fair Value Estimate for Narrow-Moat Burberry from £15.70 to £13.30, reflecting weaker expectations for this year, as well as a slower longer-term sales recovery.  

For Jelena Sokolova, senior equity analyst at Morningstar, Burberry's sales revenue, which is down 21% in the three months to the 29th of June, looks "weak." 

"The luxury sector is going through one of its downcycles, which historically don't persist for longer than one or two years, so we still see potential for Burberry to recover brand momentum," Sokolova wrote in a note yesterday.

Against the backdrop of this slowdown, Burberry has even struggled to keep up with its peers in recent months and years, failing to capture the growth of other luxury players over the last decade. This has not been helped by volatility in the C-suite; Burberry has seen three chief executives come and go in that time.

"Fundamentally, we think Burberry's issues include reliance on a slower-growing apparel segment for the bulk of sales, with a rather low contribution from trench coats, an area in which the brand is strongest," Sokolova says.

"Leather has been an investment category for a long time, but Burberry doesn't have the strong brand recognition of other players in this area. Furthermore, we believe recent price hikes for creative director Daniel Lee's collections have been taken badly by consumers, given a weakening industry backdrop and tepid brand momentum."  

The replacement of Akeroyd with Schulman could "signal a pivot towards a more affordable direction" for the brand, however.

"We also think it's important to refocus the brand on outerwear, where it is the strongest, in terms of marketing and communications," she adds.

Key Morningstar Metrics For Burberry

• Morningstar Fair Value Estimate: £157.00
• Morningstar Star Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High