Shares in fashion retailer Burberry (BRBY) rose on Wednesday as it posted a rise in profits and announced a £150 million share buyback.
Morningstar equity analysts reiterate their fair value estimate of £17.20 for Burberry shares as the company reported preliminary annual results in line with our expectations. Shares trade a little above our fair value estimate, which implies a return to growth and profit margin expansion from 2021.
New items in the product range continue to outperform, resonating well with existing and younger consumers. The first collection from new designer Riccardo Tisci will be shown in September, and a complete new creative assortment will be available towards May-June 2019. Guidance for 2019 was confirmed with stable revenue and operating margins, as distribution channels are rationalised and the product offer renewed. The company is cleaning up its distribution channels, both wholesale and retail, with 20 store closures in 2017-18. We see these actions as positive for the brand's longer-term health, and supportive of the company’s moat.
Fashion Industry Speeds Up
In terms of product offer, Burberry is increasing the pace of new product assortment “drops” available throughout the season, to spur recurring purchases and spark desire around the brand. This is consistent with the trends we see in the industry for a faster product delivery pace and away from the traditional fashion calendar – for example, Moncler’s Genius Project, Gucci’s and Louis Vuitton capsule collaborations with external artists. We regard this development positively, as no big inventory risks are taken, while the consumer perception of newness and exclusivity is increased. Burberry is also taking steps to strengthen its leather goods segment. We remain of the opinion that sustainable success in this category, with several strong market leaders and new entrants, is far from guaranteed.
Regionally, Asia-Pacific grew in the mid single digits, with mainland China cooling off in the second half of the year on a tougher comparison base, while Hong Kong improved with high single-digit growth in the second half; peers who reported previously also remarked on improving trends in Hong Kong. Sales in Europe were affected by a high comparison base in the UK last year, owing to a weakening pound that attracted tourist demand. Continental Europe also suffered from less tourist spending due to currency strength. Like peers, Burberry also saw a pickup in demand in the US in the second half of the year. The Chinese customer cluster grew at a mid single-digit rate. That said, Burberry continues to lag its bigger competitors.