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Burberry (LSE: BRBY) shares have had a disastrous time, falling more than 70% in 18 months. This epic drop even saw the luxury fashion house relegated from the blue-chip index to the mid-cap index. FTSE 250.
In terms of fashion, it's like going from Milan to Matalan!
However, the stock was rising from the ashes today (November 14). As I write, Burberry is up 20% to 879p and is heading for its best intraday gain ever.
Of course, the share price will continue to fall 37% in 2024. But all big changes have to start somewhere. Is that what we are witnessing here? And if so, should you purchase some shares?
Optimism
Over the past two years, Burberry has been hit by falling sales amid a global luxury slowdown and exceptionally weak consumer spending in key Asian growth markets, especially China.
Behind all this there has been a kind of identity crisis. Burberry originally designed clothing to protect people from the harsh British climate, reflected in their success with trench coats and scarves. But he tried to upgrade with high-priced leather goods and it backfired.
Today, new CEO Joshua Schulman (Burberry's fourth boss in a decade) addressed this in the company's half-year results.
He said: “Our recent underperformance is due to several factors, including inconsistent brand execution and a lack of focus on our core outerwear category… Today, we are acting with urgency to correct course, stabilize the business and position Burberry to return to sustainable and profitable growth...“I am sure Burberry’s best days are ahead.”
Optimism around this recovery plan is why stocks are up today.
Reality
The stock market is famous for being forward-looking, which is why a stock's price can fall even after stellar gains. It's about future expectations: next quarter, next semester, or next year.
That's a relief for Burberry today because the first half was a disaster. In the 26 weeks to September 28, revenue fell 22% year-on-year to just under £1.1bn. Sales in Asia Pacific fell 25% and 21% in the Americas, while in the rest of the world they fell “only” 13%.
As a result, the group posted an adjusted operating loss of £41m. This is slightly better than analysts expected (£45m). However, Burberry achieved operating income of £223 million. revenue in the same period last year, which tells its own story.
Management is unsure if it will turn a profit in fiscal 2025 (which ends in March). A lot will depend on Christmas.
Should you buy Burberry shares?
It is almost useless to value the stock given the decline in sales and profits. We just don't know if things are going to get better quickly, steadily, or get worse. It is understandable that the dividend remains suspended.
Schulman is cutting costs, saving £25m this year and annualized savings of around £40m thereafter. Excess inventory in stores will be reduced and there will be a global launch of “scarf bars“, starting in New York, as well as a necessary reevaluation of product prices.
Over time, he says the group can regain £3bn in annual revenue. But that will depend on Chinese consumers opening their wallets again, and we don't know when that will happen.
As we have seen with Rolls-RoyceGenuine change is based on improving financial fundamentals. I don't see that with Burberry yet, so I won't invest.
