Deciding that the Burberry (LSE: BRBY) share price looked terrific value in May was one of my weaker investment decisions. Buying the stock was an even bigger one. It became this year’s biggest portfolio faller in short order.
I’d been watching the FTSE 100 premium fashion brand after it issued a profit warning in November 2023, amid a slowdown in global demand for luxury goods. It followed this with another in January, following disappointing Christmas sales.
It’s hardly the only retail brand to suffer from forces beyond its control lately. But the board made things worse by losing control of brand messaging and making an ill-judged lunge for the super-luxury market. It slipped ignominiously into the FTSE 250.
Can this FTSE 250 stock make it back?
A crisis can bring out the best in companies, forcing them to face underlying problems. To mangle billionaire investor Warren Buffett’s famous quote, the tide had gone out, Burberry was caught swimming naked and had to get dressed sharpish.
That was my thinking when I bought Burberry shares on 15 May, averaged down on 30 May, then averaged down a second time on 7 July. I was down 40% in short order.
I buy shares with a long-term view so decided to hold on. I’m glad I did. Ridiculously, Burberry has suddenly turned into my best performer, rocketing 53.1% in three months.
The share price is still down 38.59% over 12 months, but with the stock up another 2.62% this morning on hopes of Chinese interest rate cuts, my paper loss has been slashed to just 11.02%. At this rate I might be back in the black by Christmas. Unthinkable just a few weeks ago.
The recovery started with rumours of an acquisition by Italian luxury brand Moncler, possibly supported by LVMH. Moncler denied it and I lost interest. I never make share stock decisions based on takeover talk.
Why the sudden recovery?
I paid a lot more attention to Burberry’s first-half results, published on 14 November. The stock jumped 15.4% as a result, despite revenues plunging 22% to £1.08bn. Instead, investors chose to focus on what new CEO Joshua Schulman had up his sleeve.
His ‘Burberry Forward’ strategic plan struck all the right notes, blasting the group for sacrificing its heritage to focus on a “niche aesthetic” aimed at “a narrow base of luxury customers”.
Acknowledging a problem is the first step to solving it, they say. Now Schulman has to do the hard part. It won’t be easy.
My worry is that investors have bought a recovery that he hasn’t actually delivered yet. They may not be so forgiving if the next set of figures show a continued decline.
Burberry shares look decent value at 12.55 times earnings, but not exactly cheap, given the challenges. If inflation and interest rates prove sticky, China struggles and trade wars rage, luxury demand may continue to idle.
I’ve poured enough money into Burberry and won’t buy more. I’ll just hold tight and hope the turnaround continues. I think the next stage will be bumpier, but after recent events, who knows?
