I bought a camel-coloured trench coat and scarf from FTSE 250 fashion retailer Burberry (LSE: BRBY) in 1985 that are still in perfect order. So, it is fitting perhaps that longstanding core items like these are to be the mainstay of its turnaround strategy.
The market also appears to think so. This idea and a £40m annual cost-savings programme announced in the 14 November interim results helped push the shares higher.
What went wrong?
In its own words, what went wrong for the British luxury brand is that it focused on being modern at the expense of celebrating its heritage. It also raised prices.
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This switch failed to entice enough potential customers and alienated too many existing ones. In this sense, the advent of Covid exacerbated this failure rather than caused it. There was a spike in UK sales once lockdowns were lifted, but this did not last long.
By the time of the Q1 2025 results on 15 July, comparable store sales were down 21% year on year (these are sales figures with the impact of openings, closures and refurbishments removed).
China — a key target growth market for Burberry — also struggled to rebound from the pandemic’s effects. Mainland sales there fell 21% in Q1 alone.
Overall, the firm’s retail revenue in the quarter dropped 22% to £458m and it suspended its dividend for this year.
What’s the new plan?
The new ‘Burberry Forward’ plan refocuses on what made the firm successful. This was being a highly differentiated brand with a unique heritage, particularly noted for its outerwear and scarves.
In practical terms, this means moving away from the unpopular bold colours and designs it introduced. Instead, it will refocus its classic design motifs, based around camel and red colours and black check designs.
With its core design foundations back, its CEO believes it can return to generating £3bn in annual revenue over time.
The key risk here in my view is that Burberry may find it difficult to recover the customers it has lost. Loyalty to a brand is much more difficult to build (and rebuild) than it is to lose, I think.
So are the shares undervalued?
The stock’s valuations on the key measures I have found most useful over the years are mixed.
On the price-to-book ratio, it trades at 3.6 against an average of 3.1 for a selective competitor group. This comprises Capri Holdings at 1.7, Kering at 1.8, Christian Dior at 4.3, and LVMH at 4.5.
However, on the price-to-sales ratio it is at 1.2 against the group average of 1.6, so it is undervalued on this basis.
I also ran a discounted cash flow analysis. Using other analysts’ figures and my own, this shows Burberry shares are currently 25% undervalued at their present £8.51. So a fair price is £11.35 although they may trade lower or higher than that.
Will I buy the stock?
I focus nowadays on shares with a high yield. As Burberry has suspended its dividend, it is of no use to me on this basis.
Its potential as a growth share also looks uncertain to me, given its relative stock valuations. And I think there is a major question over whether it can recoup the core clientele it lost.
So currently I have no plans to buy the shares.
