Morningstar equity analysts are increasing their fair value estimate for shares in luxury clothes brand Burberry (BRBY) to £17.90, below the current share price of around £23 a share, to reflect positive currency movements. The shares have a two-star rating, which means they are currently overvalued.
We now expect largely flat sales and profits in 2019 and 2020, in line with management guidance and driven by improvements to the distribution channel, which we see as the correct – although painful – step. We expect a return to growth thereafter to a slightly above-industry rate, driven by same-store and online sales and supported by product innovation across categories.
In the longer term, Burberry could benefit from growth in middle-class customers across the globe, as well as from demand from existing middle-class customers, boosted by growth in their incomes. Although adding new wealth at a slower pace than in the past, China presents a major opportunity through increasing consumption share of GDP and pent-up demand from the second middle-class generation.
We expect better leverage in selling, general, and administrative expense in the longer term, as retail expansion slows and growth in demand results in higher same-store sales. Some overlapping costs would also be taken out, helping the bottom line.
We expect margins to recover to over 20% over the five-year time horizon, versus 17% currently, which is still below the high 20s for some more focused peers. We expect Burberry to increase its top line growth at 3.9% over our 10-year forecast period, with the majority of growth coming from same-store sales.
Our five-year forecast assumes slightly positive currency contribution over a five-year period, based on the British pound forward curve.
