Burberry Earnings: Weak Performance, But New Strategy Makes Sense to Us

Shares surge on turnaround cost-cutting plan, and return to core retail lines designed to convince shoppers

Jelena Sokolova 14 November, 2024 | 2:46PM
Facebook Twitter LinkedIn

brby

We maintain our fair value estimate for narrow-moat Burberry as it announced weak first-half results and provided some insights into its turnaround plan. Shares are trading in 5-star territory with 80% upside to our fair value estimate. Although it’s a challenging task to execute a turnaround amid tough macroeconomic conditions, we are positive about the strategy and its early implementation while the valuation remains undemanding.

We are encouraged by Burberry’s focus on areas where the brand is strongest, namely outerwear and scarves. We previously argued that these areas, which differentiate Burberry from its peers, are not emphasized sufficiently. That said, these products contribute around 40%-50% of revenue by our estimates and wouldn’t, alone, move the needle for a brand turnaround. Management’s view is that they should provide a positive halo effect for the rest of the range. We’ve long highlighted that Burberry’s disadvantage is a relatively small contribution from products where its brand is the strongest, but we view the renewed focus on them as positive. We also support the desire to appeal to a wider consumer audience versus a niche, fashion-driven strategy the brand was pursuing before.

The company’s take on pricing makes sense to us. Burberry intends to raise prices selectively upward for products with high brand strength (outerwear) while maintaining entry price points and resetting pricing for cheaper products such as polo shirts and leather (an intensely competitive area where the Burberry brand isn’t strong) to where they were 18-24 months ago. The company is not moving toward accessible luxury offerings and is largely maintaining its store footprint.

Cash flow was negative £184 million in the first half, attributable to a 20% revenue decline and operating losses. The company is addressing cash flow concerns through a one-time inventory clearance and previously announced dividend suspension.

Key Morningstar Metrics For Burberry BRBY

Economic Moat: Narrow
Morningstar Rating: 5 stars
Fair Value Estimate: £13.30
Morningstar Uncertainty Rating: High
Sector: Consumer Cyclical

Burberry Share Price vs Morningstar Fair Value Estimate


The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Jelena Sokolova  is an equity analyst for Morningstar

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures