FTSE 100 stock Burberry (LSE: BRBY) has taken a massive hit. A little over a year ago, its share price was near 2,640p. Today however, it’s about 70% lower. Could this be one of the Footsie’s best value stocks after its huge fall? Let’s discuss.
A high-quality business
I’ve always thought there’s a lot to like about Burberry from an investment perspective. I’m a ‘quality’ investor and the luxury fashion house has a lot of attributes I look for in a stock including:
- A strong brand
- Solid long-term growth prospects (due to rising wealth in the emerging markets)
- A high return on capital (ie high level of profitability)
- A solid balance sheet
In theory, it has all the right ingredients to be a good long-term investment.
Multiple profit warnings
However, right now, the company’s a bit of a mess. Recently, it’s announced a series of profit warnings, the latest one coming yesterday (15 June). It’s also suspended its dividend, which suggests the near-term outlook isn’t good.
One problem for the group is China, which has traditionally been a big market for the company. The economic slowdown there has impacted a lot of Western businesses including the likes of Nike and Estée Lauder (two stocks I hold).
Another issue is that demand for luxury goods globally has cooled dramatically after a boom during the pandemic when many consumers had far more disposable income.
As a result of these two factors, comparable store sales for the 13 weeks ended 29 June (Q1 FY2025) fell 21% year on year.
The slowdown in trading we experienced in Q1 FY25 continued into July. If this trend were to continue through the current quarter, we would expect to report a H1 FY25 operating loss and FY25 operating profit to be below current consensus.
Q1 trading update
Earnings downgrades
The problem for investors when a company’s experiencing challenges like this is that it can be hard to accurately value the business. That’s because earnings forecasts are likely to fall.
Right now, City analysts expect Burberry to post earnings per share of 51.6p and 65.2p for FY2025 and FY2026 respectively. At those figures, we get price-to-earnings (P/E) ratios of 14 and 11, which suggest the shares are pretty cheap.
But what if these forecasts (which have come down significantly in recent months) were to fall 30%? Then we’d be looking at P/E ratios of about 20 and 16, which isn’t so cheap.
A top value stock?
So the way I see it, it’s hard to know if this is one of the best value stocks in the FTSE 100 right now.
If the luxury goods market improves and the company can turn things around, it could turn out to be. However, if the backdrop remains challenging, the stock could fall further.
Personally, I continue to believe the stock has long-term potential. However, I won’t be buying it until there are some indicators that momentum within the business and the industry is improving.
