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Good taste is always in fashion. Whatever you think about the taste of a fashion house, Burberry (LSE: BRBY), however, its shares have fallen out of fashion in the City. Over the past year, the FTSE 100 Index Its share price has plummeted by 68%.
In other words, you could buy three Burberry shares for roughly the price you would have paid for one a year ago.
I recently added the company to my portfolio because I think it could be a great bargain.
Why did the stock fall 68%?
To start, let me address the key issue: after all, it is very rare for a FTSE 100 stock to lose 68% of its value in a year for no reason.
The problems in the business were already visible in last year's results and did not start in the last quarter. However, even a quick look at the quarterly update published this week shows some of the problems.
Retail revenue fell by more than a fifth compared with the same quarter last year. Comparable store sales were at least 16% lower across the company’s three business regions, showing this is not a localised problem. The dividend was scrapped and the chief executive was replaced. Phew!
Long-term potential
Still, as a long-term investor, I am willing to hold stocks for years if I believe the investment is worth it.
I do not underestimate the risks facing Burberry from lower luxury spending globally. The situation could get worse before it gets better.
However, I see this as a broad-based risk. I don't think Burberry is a turnaround case, but rather a company that is suffering from problems across its sector.
It may be limited in the mid-market, as a company with products that are not cheap but are not at the top of the luxury world either. Still, that has been the case for decades, and the FTSE-listed firm's brand depth, British design heritage and global distribution network have helped it perform well. I see these as strengths that continue to hold true.
Possible deep value
I believe these strengths could prove valuable in the future. On that basis, Burberry's current share price could prove to be a real bargain over the long term.
Several directors bought shares this week with their own money. I take that as a vote of confidence from people close to the boardroom. But, while that reassures me, directors can make bad investments just like anyone else.
What really surprises me here is that a proven company, which has a lot going for it and has generated huge profits in the past, has seen its shares marked down so drastically.
The company is sailing through turbulent waters and I expect that to continue. But I think the ship itself, while it may need different steering, is a solid one. I think the FTSE 100 share price is set for a worse future than I expect.
