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if i had bought Burberry (LSE:BRBY) a year ago, it would have earned 22% excluding dividends. This would have allowed my money to far outpace inflation. So with another positive outlook in their most recent third quarter update, I think the stock may continue to outperform inflation.
Old-fashioned numbers?
| Metrics | Consensus | Q3 2023 | Q3 2021 |
|---|---|---|---|
| retail revenue | £777 million | £756 million | £723 million |
| Sales growth in comparable stores | one% | one% | 7% |
Despite only missing analyst estimates in its most recent trade update, there were plenty of positive takeaways from Britain’s unique luxury company.
Although comparable store sales growth showed little movement, excluding China from the figures paints a clearer picture of the company’s underlying performance. In fact, in the three reported quarters in FY23 thus far, Burberry’s sales excluding China have grown double digits.
And despite China being the Achilles heel of the group in 2022, the road ahead is expected to be smoother. Outgoing COO Julie Brown is optimistic about the country’s prospects, citing a number of catalysts for a strong rebound:
- Net domestic deposits to nearly RMB 12.5 trillion in 2022, 3.5 times in 2020.
- The government stimulus should encourage spending as interest rates remain relatively low compared to other countries.
- Chinese citizens account for 40% of Burberry’s revenue. In 2022, this figure was only 25% due to lockdowns.
As a result, the board has reiterated its outlook for single-digit revenue growth and 70% gross margin for the full year, while maintaining its medium-term guidance of £4bn in revenue as well.
Authenticity check
The biggest takeaway from the report, however, was that customers gravitated toward higher-priced items. These include handbags and leather goods. Most notably, Burberry’s British-styled and checked products fared better.
For example, its trademark plaid scarf made up 60% of soft accessory sales. This is the key to the FTSE 100 Stalwart’s long-term growth. Management is aware that for Burberry to increase prices and expand its margins, it will have to be authentic and stick to its roots: its British character. As such, new CCO Daniel Lee is expected to push this aesthetic into his new product line next month.
Premium valuation?
So with strong tailwinds as China reopens, a decent dividend yield, and a strong balance sheet, should you invest in Burberry stock?
Well, the upside potential certainly exists, and City Index analyst Joshua Warner shares the same sentiment. He is forecasting comparable sales growth of around 7.3% in the fourth quarter, with retail sales topping 9%. That said, it’s also worth noting that Burberry shares are trading at pretty expensive valuation multiples.
| Metrics | valuation multiples | industrial average |
|---|---|---|
| Price-Earnings Ratio (P/E) | 20.7 | 26.5 |
| Price-Sales Ratio (P/S) | 3.1 | 1.5 |
| Price-to-book (P/B) ratio | 5.4 | 3.0 |
| Price to earnings growth (PEG) ratio | 0.6 | 0.1 |
So it’s no surprise to see Burberry’s current share price higher than most banks’ original price targets. This is because price targets only have a one-year time horizon. For that reason, the tailwinds of the reopening of China and the new Daniel Lee collection have not been properly priced.
After all, Lee’s collection will only hit stores starting in September. This means that any increase in revenue from better products and designs will only come in the second half of FY24. Having previously sold the stock when I reached my target price, my model reorganization suggests a greater upside, which is why I’ll buy Burberry stock in due course.
