Luxury brand Burberry’s (LSE: BRBY) latest annual results haven’t gone down well with investors, with a 6% plunge in share price on Thursday. It recovered somewhat after the initial reaction, but at the time of writing this, this recovery is far from complete and it’s still well down, at 1,843p, from the 2,325p of last August. The company’s facing problems, to be sure. But the question that comes to my mind is: does it merit such a fall? And more importantly, is it time to hoard or to sell?
Spooked by the China factor
To me, the results aren’t entirely irredeemable, especially as Burberry is in the middle of a massive transformation that it previously said would crimp profits. Revenue grew by 2% for the year ending March 30, which is only slightly lower than the 3% growth rate seen last year. The picture was mixed with respect to the various earnings measures provided, but broadly, the trend showed a decline. Gross profits and adjusted operating profits fell, although operating profit was up.
But what seems to have spooked investors is the slowdown in key geographies. When I started tracking the global economy years ago, there was a commonly quoted adage: when the US sneezes, the world catches a cold. I think China can safely be added to it now, with that economy’s meteoric rise in the past two decades that has gone hand in hand with greater consumer spending. But while a number of brands have benefited from rapidly expanding demand (including Burberry in the past), Chinese growth isn’t guaranteed.
These latest results, I believe, were a shining example of that and the company was hit by demand softening in both China and the US, with revenue growth only in low-single-digits. The disappointment from China is particularly notable, because Burberry had been growing there by mid-single-digits, according to the Q3 update in January. The Americas trend has been more consistent, as the firm has been hit by softer footfall for a while.
High exclusivity
I think an investor interested in a diversified, cross-sectoral portfolio, should not be worried by cyclical fluctuations in demand but consider it part of a long-term investment in the only luxury consumer goods brand in the FTSE 100 group of companies. There are a number of other fashion retailers in the FTSE 250 universe, including Next, SuperDry and Ted Baker, but none of them yet has the longevity or the brand position of Burberry.
Good long-term returns
And there’s more going for it. Over the past five years, the share price has far outstripped growth in FTSE 100, with the latter increasing by 9% and but Burberry by almost three times that number. It’s true that it trended downwards last year, but this trend was weighted towards the first half of the period, with a steady (if not compete) recovery since. The company itself has a positive outlook, confirming its “financial guidance for broadly stable revenue and adjusted operating margin” for fiscal 2020. It’s also expecting continued cost savings in the year and is positive about the initial reactions to its new collections.
I have argued in favour of Burberry’s continued value earlier, and continue to stick to my beliefs about it based on these reasons.
