Burberry (LSE:BRBY) shares have recovered by more than 20% since May. In fact, its stock has been rallying in recent weeks after a reshuffling of its management team was announced. So, should I be buying its shares?
Well insulated
As a luxury goods company, Burberry stands to gain during a time of inflation. This is in part due to a psychological phenomenon called the Veblen effect. This is when consumers perceive an increase in price as a good thing because it brings better value.
This effect could be seen when Burberry gave its Q1 trading update. Although overall revenue stagnated, this was due to Chinese sales being dampened by lockdowns. The real spark was the numbers from Europe. Sales from the region saw significant growth despite sky-high inflation plaguing the region.
It’s for that reason that Burberry was able to provide a positive outlook. The board forecasts to hit high single-digit revenue growth, which should be further helped by a weaker pound. Additionally, management expects to achieve an operating margin of 20% by FY24.
Daniel Lee’s in the house
Last month, current COO and CFO Julie Brown mentioned her intention to step down from her role in March. Although her replacement is yet to be named, outgoing CCO Riccardo Tisci was replaced with Daniel Lee. As a result, Burberry saw its share price rally by 10%.
Despite Tisci’s excellent reputation, Lee is thought to be bringing a breath of fresh air to the brand. During his time at Bottega Veneta, Lee managed to revive the brand during a period of stagnation. This is what Burberry shareholders will be expecting when he releases his first line in February. He’s expected to use his experience at Bottega innovate the British brand’s heritage check and trench into a collection of best-selling leather accessories, which have been lagging behind the likes of LVMH, Gucci, and Dior. As a result, an overhaul and pivot towards a younger generation should boost sales and margins, according to fashion analyst Flavio Cereda of Jefferies.
Is Burberry wearing off?
With that in mind, would I add to my current Burberry position? Well, I’ve got no doubts about the British firm’s financials. It’s got a robust balance sheet and has been able to maintain its excellent profit margins of 14% through this difficult period.
That being said, I do have my reservations. Burberry still heavily relies on China to prop up its numbers. Given that more than half its sales come from Asia, hoping for a rebound there is a massive bet. The latest data from China shows how risky this bet is, as consumer spending dropped substantially in September.
Even so, I believe the high-end resilience of the luxury market paired with the long-term prospects of the company make it a great inflation hedge. Nonetheless, the current headwinds surrounding a China recovery presents a ceiling to its earnings potential. I think this is why Burberry shares have failed to breach the £20 mark.
After all, analysts from the likes of Barclays and JP Morgan have given the stock a neutral rating with a target price of £20. Therefore, I’m planning to hold my current position for the time being and may buy more if the stock drops lower.
