Why I’m still not buying Burberry Group plc and Pearson plc

Bilaal Mohamed explains why he thinks investors should steer clear of Burberry Group plc (LON: BRBY) and Pearson plc (LON: PSON) for the time being.

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Luxury fashion retailer Burberry (LSE: BRBY) has been undergoing a challenging period of late with the slowdown in its key Asian market taking its toll, together with a decline in its wholesale and licensing operations. Results for FY2016 showed a £29m fall in the FTSE 100 group’s pre-tax profits to £415.6m, on slightly lower revenues of £2.52bn. Underlying earnings were also down for the first time since 2009, 10% lower than the previous year.

In its latest update the luxury retailer said that its ambitious revenue and productivity plans remained on track and that it had successfully implemented its see now, buy now runway collection. But total revenue for the six months to 30 September came in 4% lower than the same period a year earlier on an underlying basis at a disappointing £1,159m. Retail revenue was up 2% to £859m, but this was offset by a decline in wholesale and licensing.

Favourable currency movements

Therein lie some of the problems. Wholesale revenue was down 14% to £287m, in part reflecting strategic brand elevation in its US operations and Beauty division, while licensing revenues were down by a massive 54% to £13m, blamed on the planned expiry of Japanese Burberry licenses. The focus on its own retail rather than wholesale should be yielding better results and Beauty is meant to be an opportunity for growth, not a problem area.

The group’s half-year results were actually much better when viewed at a reported level, due to favourable currency movements, but in my opinion this just masks the underlying problems.

On a more positive note, the firm has successfully launched its redesigned Burberry.com website and remains on track to deliver planned cost savings of around £20m in the current financial year to March 2017. There was also a 30% surge in comparable sales in the UK, helped by spending from travelling luxury customers lured by the slide in sterling. But for me the challenges facing the luxury market remain a concern, particularly in the all-important Asian market.

And perhaps the main issue is that the shares still come with a premium rating at 19 times earnings for fiscal 2017, which for me is too demanding given the challenges it continues to face.

Dividends exposed

Multinational publishing and education firm Pearson (LSE: PSON) is another blue chip firm by which I remain truly underwhelmed. Just five years ago the company was enjoying healthy pre-tax profits in excess of £1bn, but these having been slowly eroding, with the company announcing earlier this year that it had posted a £433m loss for 2015.

In a recent update, the media firm revealed that underlying sales had dropped 7% for the first nine months of the year due to declines in assessment revenues in the US as well as the UK, with added declines in North American Higher Education courseware as a result of inventory corrections by retailers in July and August.

Despite the downturn, Pearson continues to reward shareholders with healthy dividend payouts, but these are barely covered by forecast earnings. I think recent disposals should help to keep the payouts safe for now, but earnings will need to improve in order to avoid future dividend cuts. Investors should seek out safer dividends elsewhere, I believe.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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