FTSE 100 stock Burberry (LSE: BRBY) dropped by almost 10% in early trading on 16 November 2023.
The luxury international brand owner is known for its distinctive check design. But such quality credentials did not stop the company issuing a profit warning with the interim results report.
Earnings came in down a bit for the six months to 30 September. But the real damage came from the outlook and guidance statement.
The directors said they are “confident” in their strategy and are committed to achieving the company’s medium- and long-term targets. However, the slowdown in luxury demand globally is affecting current trading.
Lower earnings ahead
If the weaker demand continues, Burberry will be “unlikely” to achieve its stated revenue guidance for the current trading year. That means adjusted operating profit will probably be towards the lower end of the current consensus range of £552m to £668m.
Ouch! No wonder the report pulled the rug from under the share price in today’s fragile markets. It’s the exact opposite of what investors want to hear their investee companies saying. Most would prefer utterances such as ‘exceeding expectations’ or ‘blown the blooming doors off’. Oh well, maybe we’ll get that another day from Burberry.
But what about the stock now? Billionaire investor Warren Buffett is known for hunting the stocks of quality businesses when they are temporarily down on their luck. Then he typically holds them for years as the underlying business recovers.
A turnaround is never certain with any business, of course. But when Buffett picks a good one at a lower price, rising earnings and a valuation re-rating higher often drive decent returns for him. So, his investment strategy looks appealing and worth trying to copy.
Burberry looks like a high-quality business. The operating margin has been running near 21% and the return on capital at about 23%. On top of that, the multi-year financial and trading record has been steady, albeit with a little wobble during the pandemic. But that’s forgivable.
Brand strength
The strength of the brand has been working to help the business survive and thrive. It’s a big advantage acting like an economic moat for the company. So, at first glance, Burberry looks like a Buffett-style opportunity worth pursuing now.
Meanwhile, with the share price near 1,593p, its back near levels first hit around 12 years ago. So, the possibility of better value now is on the cards.
City analysts are optimistic that the dip in trading will be a one-year event. And they’ve pencilled in a rebound and growth in earnings of about 12% for the 12 months to April 2025.
That seems reasonable. Recessions and economic downturns are often short-lived. And it’s easy to imagine a scenario with economies bouncing back and consumers feeling financially flush again.
However, Burberry has just demonstrated its cyclical vulnerabilities. And that weakness is one of the main risks for investors now. It’s always possible for trading to become even worse and for the stock to move lower still.
Nevertheless, chief executive Jonathan Akeroyd is “confident” in the firm’s strategy to realise Burberry’s potential as the modern British luxury brand. And I reckon the opportunity is well worth investors’ further research and consideration time now.
