What are the long-term prospects for Burberry Group plc (LON:BRBY)?
I'm always searching for shares that can help ordinary investors like you make money from the stock market.
Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.
I hope to pinpoint the very best buying opportunities in today's uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!
I'm assessing every share on five different measures. Here's what I'm looking for in each company:
1. Financial strength: low levels of debt and other liabilities;
2. Profitability: consistent earnings and high profit margins;
3. Management: competent executives creating shareholder value;
4. Long-term prospects: a solid competitive position and respectable growth prospects, and;
5. Valuation: an under-rated share price.
A look at Burberry Group
Today I'm evaluating Burberry Group (LSE: BRBY), an international retailer that designs and sells luxury men's, women's, children's clothing and non-apparel accessories, which currently trades at 1,366p. Here are my thoughts:
1. Financial strength: Burberry is in strong financial position with over £500m in cash on the balance sheet and a net cash position of £237m. Interest cover is sizable at 538 times, while free cash flow generation has been very good averaging more than £200m per year over the last three years.
2. Profitability: For the past 10 years, Burberry has grown revenue and earnings per share at an outstanding rate, increasing by 14% and 17% per year, respectively, while dividends have grown by eight times since 2003. Operating margins have been excellent, consistently around the high-teens and low-twenty percent range, while the 10-year average ROE has been phenomenal at 27% -- all the more impressive considering the company has employed little debt.
It has even proven resilient to the financial crisis, growing revenues at 20% per year, earnings per share by 32% and dividends by 34% per year over the last three years, mainly driven by the increasing appetite for luxury goods in emerging markets.
3. Management: Current CEO Angela Ahrendts is widely credited, along with her predecessor, former CEO Rosemarie Bravo, and creative director Christopher Bailey for the brand's phenomenal growth the past decade. They introduced more modern and hip product lines; launched innovative marketing strategies such as "The Art of the Trench" and broadcasting fashion shows online; and launched well-targeted ad campaigns featuring trendy British models and actresses, which revitalised the brand and restored its high-level fashion image. Along with this, management has also rewarded shareholders by means of share repurchases and dividends totalling around £780m over the past 10 years.
4. Long-term prospects: The group has accelerated retail expansion in existing and new markets during the last few years. It has strengthened its position in flagship cities around the world by refurbishing and opening more mainline stores, and opening new stores in under-penetrated growth markets in Central and Latin America, India and the Middle East. It already has a leading presence in China, the fastest growing luxury market in the world, with a total of 70 stores opened by year-end.
Also, the company has invested heavily in digital technology where it is now the leading luxury brand in the digital marketing arena. It already has around 15 million fans in Facebook and has a leading presence in China's social media networks.
5. Valuation: Burberry shares are currently trading at a trailing price-to-earnings (P/E) ratio of 22 and forward P/E of 21, well above its 10-year P/E average of 18. Its price-to-earnings-to-growth ratio (PEG) is 1.1 and the current dividend yield is 1.96%.
My verdict on Burberry Group
The future looks bright for Burberry, as the world luxury market is expected to increase by 6-7% per year through 2015: it is well positioned to take advantage of this trend with a leading presence in emerging markets and a well-recognised brand name throughout the world. However, its P/E and PEG ratios are already high, implying that growth has already been factored in its share price. If demand slows down in its major markets, there is a huge risk that the company might not be able to sustain returns similar to that of the last few years.
So overall, I believe Burberry Group at 1,366p looks like a hold.
Another growth opportunity
Although I feel Burberry Group is a hold right now, I am more positive on the FTSE share highlighted in this exclusive in-depth report.
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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
> Zarr does not own any share mentioned in this article. The Motley Fool has recommended shares in Burberry.