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Scanning the FTSE 100 Index For potential buying opportunities, I was attracted to Burberry (LSE: BRBY) shares.
It has easily been one of the worst performing stocks in the UK's main index so far this year.
Let's take a deeper look at what happened and see if there is enough substance for a possible recovery.
Volatility is hitting hard
Burberry shares have fallen 66% over a 12-month period, from 2,180p at this time last year to current levels of 737p. In 2024 alone, they have fallen 47% from 1,416p at the start of the year to current levels.
It's not hard to identify the recent troubles of one of the world's most recognizable fashion brands. Economic volatility around the world has affected many sectors and companies, and luxury fashion and Burberry have been affected.
Rising inflation, slowing growth in key markets such as China and, in turn, declining spending have hurt business.
In its latest update, a first-quarter report released on July 15, the company said that in-store sales fell 21% compared to the same period last year. This came on the back of multiple profit warnings prior to this update. In fact, the company is on track to post an operating loss for the current half year.
Recovery or continued decline?
I'm an optimist, but I'm not even excited about Burberry's stock. However, the fact is that its brand power, broad reach and growth potential are exciting.
The last point could be the key to any recovery. With such a strong presence and track record of success in Asia, one of the richest regions in the world, there is potential for profits to pick up in the long term. This is linked to rising wealth in this area. However, past performance is never a guarantee of the future.
From a valuation perspective, I must admit that Burberry's current valuation is tempting, with the stock trading at a price-to-earnings ratio of just nine. To put that into context, the historical average is over 22, so the stock is in bargain territory.
What about yields? Well, when a share price falls, the dividend yield rises. However, Burberry recently announced that it will suspend payments, at least for now. So I have one less thing to add to the plus column as part of my investment argument. However, as dividends are never guaranteed, it's not something I couldn't foresee after a turbulent period.
My verdict
I think that once the volatility calms down, Burberry could get back on track, profits could rise and the share price could rise once again, provided there are interest rate cuts and China's economic problems calm down.
In my opinion, it's a long road ahead. As a reckless investor interested in long-term investments, I'd be lying if I didn't say I was tempted.
However, I feel my money is better invested in what I consider to be better options at this time to help me build wealth. However, I will certainly keep an eye on developments and may review my position soon.
