Burberry's (BRBY) first-half sales update gave evidence of solid growth despite macroeconomic worries and exchange rates, which are beginning to reverse. We believe investments in core outerwear, reinvigoration of retail, and digital experience all support the Burberry brand, which is the source of our wide moat rating.
Excluding currencies, retail comparable sales were up double digits in the first half and high single digits in the second quarter, with price increases and product mix contributing to the performance. We regard pricing power as evidence that brand equity is strong and that product, marketing, and branding investments are not dilutive.
Shares are now trading just slightly below our £14.45 fair value estimate, which we will not change at this time. The sales update was largely in line with our internal forecast, and we believe current profit worries will offset with currency reversals in the coming 12-24 months.
Sales grew 7% reported to a total of £1.1 billion, given the drag from the strong British pound, but grew a stronger 14% excluding currencies. The currently strong U.S. dollar could soften the headwind from foreign exchange or even reverse the issue next year, in our view. Management commented that global market worries from Hong Kong to Russia would put further downward pressure on profit, but also said currency headwinds had lessened by about £30 million since the prior sales update, and it expects the pressure to mostly offset the savings. Store openings and closings are expected to be 20 for the year, with the total being mostly relocations or replacement expansion.
We note that despite macro worries, comparable growth is relatively solid, and above peers. Although management doesn't break out digital sales as a retail growth driver, thus far Burberry has managed to improve digital sales and experience in a way that is brand accretive, rather than dilutive.
