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He Burberry (LSE: BRBY) share price has fallen 75% in just a year and a half. To add salt to investors' wounds, dividends were suspended and the stock was relegated to mid-cap. FTSE 250.
But after a decline that seems longer than that of one of the brand's iconic trench coats, could the bottom finally be in sight? And could a big recovery even be on the cards? Here are my thoughts.
Brand elevation
When I was younger, some items (mostly plaid scarves and caps) weren't necessarily associated with the wealthy buyers Burberry wanted. I remember seeing a motorcycle doing a wheelie down the road with the driver completely dressed in Burberry plaid (real or not).
In fact, a 2011 book by Owen Jones called Chavs: The demonization of the working class It had a Burberry-style plaid hat on the cover. These partnerships had a negative impact on the brand's luxury image, to put it mildly.
In response, and as part of a broader trend in the luxury sector, the company reduced the visibility of its checkered pattern; controlled licensing agreements to give you more control; and focused directly on premium and high-end fashion. This strategy successfully restored its must-have status at the time.
However, in recent years, Burberry's sought to position itself as an ultra-luxury brand. While this measure is ambitious, it has faced significant challenges.
The stock looks cheap
The highest prices compare it to companies like Gucci and Louis Vuitton. But customers have been slow to accept this, especially during a cost-of-living crisis and weak consumer spending in China.
In the first quarter, sales fell 22%, and if that trend continues, the company said it will report an operating loss for the first half. Chief executive Jonathan Akeroyd abruptly left and the dividend was withdrawn.
Looking ahead, brokers expect revenue of around £2.4bn for this financial year and next. At the current share price, this gives the stock a relatively low price-to-sales ratio of 0.93, making it look cheap.
However, it is worth noting that this forecast revenue is below the level achieved in 2019. Although the luxury goods sector is in a recession at the moment, I find this lack of growth boring.
Two options
According to Bernstein luxury analyst Luca Solca, Burberry essentially has two options. One is to follow the example of the American brand Coach and attract a broader audience. The second is to move forward with the brand elevation strategy.
If this is the 'British Coach' strategy, then I think a big swing in Burberry's share price is possible. Especially when the luxury sector as a whole finally recovers.
The hiring of former Coach CEO Joshua Schulman clearly points this route. As Solca points out: “You can't raise prices with one hand and sell a billion pounds in stores with the other.”.
my decision
Can Burberry get out of the luxury trenches? I have no idea, but I would at least prefer to know what their strategy is before considering investing. I guess we'll know more in November when the company reports its first-half results.
The stock looks cheap, but there is too much uncertainty to confidently anticipate a strong rally. Therefore, I will be buying more Burberry shares as the seasons change and we all start reaching for our outerwear.
