I like several things about global luxury goods manufacturer, retailer and wholesaler Burberry (LSE: BRBY).
For example, the company’s operating margin is running above 20%. And the balance sheet looks strong with only a modest level of net debt. I’m also impressed by the multi-year record of generally rising revenue, earnings, cash flow and shareholder dividends.
Overall, it’s hard for me to fault the quality indicators. However, I’m not the only investor who’s noticed the company’s attractions and the valuation looks full.
Expansion abroad and earnings growth
Following a hit from Covid-19, City analysts expect a strong rebound in earnings for the current trading year to March 2022. Then they’ve pencilled in further growth of around 14% for the following year. And with the share price near 2,251p, the forward-looking earnings multiple is just under 24. Meanwhile, the anticipated dividend yield is around 2.3%.
That’s pricey. And it’s always possible for those analysts to downgrade their estimates for earnings if the underlying business loses some of its operational momentum. So, although I’m seeing a quality enterprise, the valuation adds to the risk of me owning the stock.
However, the business and its British brand are making huge strides in expanding abroad. In the trading year to 27 March 2021, 52% of overall revenue came from the Asia Pacific region. And 27% came from Europe, the Middle East, India and Africa, with 21% originating in the Americas.
Chief executive Marco Gobbetti said in the full-year report that the company has “transformed” its business over the past three years. The brand is now “anchored” in luxury, with a “revitalised” brand image.
Looking ahead, the directors have their sights set on further growth. The aim is to drive the appeal of the brand with a relentless focus on quality. I think that’s a decent strategy in a world awash with cheap, low-quality merchandise. Much of the ‘junk’ we buy doesn’t last long and is often unfit for purpose. My guess is we’ll see a backlash against low quality in the years to come. And businesses such as Burberry could continue to do well.
Aiming for full-price sales
Along with the pursuit of quality, Burberry is also driving full-price sales rather than markdowns. And that makes a great deal of sense to me because a higher price is often a marker of quality. One example of a strategy based on that theme is the old ‘reassuringly expensive’ advertising campaign run by the Stella Artois brand over many years.
The directors reckon the adjusted operating margin will likely be under pressure in the current trading year to March 2022. The reasons for that are “operating expense normalisation” and increased investment to “accelerate” growth. However, in the years following, the company expects advances in the operating margin.
On balance, and although there are risks, I’d like to own this stock for the next 10 years or so. And I’d aim to buy some of the shares on dips and down-days, despite the pricey valuation.
