I think FTSE 100 luxury retailer Burberry (LSE: BRBY) is a stock that you can buy and hold in your portfolio forever.
With its global brand recognition, international footprint and reputation for quality, the business has a status that few other companies can claim.
On top of Burberry’s brand power, the company is also a very well run business. Management has prioritised cash generation and margin growth. It has also refrained from chasing sales growth at any cost, which could increase overall revenues but could cheapen the brand at the same time.
Moving upmarket
Burberry’s new strategy is aiming to move the business even more upmarket. And under chief executive Marco Gobbetti and creative head Riccardo Tisci, the company is looking to expand its presence still further in high-margin areas such as leathergoods.
It has also launched a new initiative with a major Chinese technology company to create a physical-to-digital social retail experience in the southern Chinese city of Shenzhen in the first half of next year.
The company has described social retail as “a concept that blends social media and retail to create digital and physical spaces for engaged communities to interact, share and shop.”
Only time will tell if this focus on technology will pay off, but what it does show is that Burberry is committed to developing and reinforcing its brand image in the eyes of its consumers and in the world’s largest consumer market. This commitment is one of the reasons why I think the company is an excellent long-term investment.
Another reason is its cash generation. At the end of the first half of the company’s financial year, Burberry reported a net cash balance of £670m, up from £647m in the prior-year period.
The group’s cash balance increased even after returning £129m cash to shareholders through dividends and £15m with a share buy-back. This cash balance makes up around 8.3% of the company’s current market capitalisation and is equivalent to around 161p per share.
Undervalued
At the time of writing, shares in this luxury retailer are currently dealing at a forward P/E ratio of 22.7. This figure is expected to fall to 20.5 next year, based on current City growth projections.
While this number might seem high at first, there are two reasons why I believe Burberry deserves a premium multiple. First of all, as luxury retailers go, the stock looks cheap. French luxury goods giant Christian Dior trades at a forward P/E of nearly 30, for example. The average of US luxury brands is around 20.
Then there is the company’s cash balance to consider. When you strip out the 161p per share in cash, Burberry’s cash-adjusted 2021 P/E falls to 19.4, which makes the stock look cheap compared to many of these luxury peers. There’s also that dividend yield of 2.3% on offer for income investors.
The bottom line
So overall, I think shares in Burberry look slightly undervalued at current levels, considering the group’s luxury heritage and cash balance. With this being the case, I think the stock could be a great buy-and-forget investment for your portfolio today.
