The share price for luxury goods producer Burberry (LSE:BRBY) has declined sharply in October so far, as macro-economic concerns, trade policy challenges and the unknown outcome from Brexit come to the fore. Given the company’s robust long-term financials, its current trading prices as well as counter industry and economy-driven factors, the likelihood of Burberry remaining a good long-term investment bet is still high in my opinion.
But first, the downside.
Global trade policy is in a flux, driven by the US-China trade war. China is a major customer for Burberry, with Asia-Pacific accounting for 41% of Burberry’s sales in 2017. There is also a cloud over the potential growth in sales to the EMEIA region, which accounts for another 36% of the sales, on account of a lack of clarity on Brexit. With no deal in sight and the expiry date of March 29 2019 fast approaching, a no-deal Brexit is now a real likelihood. This has implications for both domestic and EU demand for Burberry products. The nature of both issues is such that the ultimate economic outcomes could take years to conclude. As a result, short-term fluctuations in the share price are all but given.
It does not help that the 2018 (year ending March 31) financials, as well as future outlook, gives little reason for investors to be buoyant. Burberry saw a small decline of 1.2% to its revenues to £2.7bn from the previous year. Going forward as well, the company expects revenues and operating profits to be “broadly stable” over the next two years. This may just be a cautious statement, but in conjunction with external risks, suggests that it could well be a real possibility, with limited upside.
Nevertheless, there is enough reason to still remain bullish on Burberry.
For one, over the long term Burberry has only added value. On average, the Burberry share price has given returns of 20.4% over the past 10 years, even though the number hides wide gyrations on either side on a year-on-year basis. This is a far superior performance on average compared to the FTSE 100.
Strong share price performance over the long term is driven by the company’s continued financial health. The company’s revenues have grown on average by 10.7% over the past decade, and operating profits have started improving in the past two years after declining in the two years prior as well. It is worth noting that all three metrics – revenue, operating profits and free cashflow – have improved since the dent witnessed in 2016, the year after which the company saw change in its top management. The improvements thus provide confidence in the new management’s abilities to steer Burberry though the present times.
Lastly, despite global economic headwinds, global growth is expected to remain strong in 2018 and 2019 at 3.7%. This includes slightly tapering but strong growth in China, which has been a cause of concern for analysts. For investors with a heart brave enough to withstand stock fluctuations as well as a long-term vision, the current decline in stock price may just be the right time to buy the shares.
