While many are tightening belts and cutting budgets at the moment, luxury goods retailer LVMH is having no such trouble. The firm’s pricey handbags, watches and perfume have been flying off the real and virtual shelves. Across the Channel, Burberry (LSE: BRBY) shares offer me something similar as the only high-end UK fashion business to invest in. The British firm’s fortune has been improving recently, and management is very keen to follow the path trodden by LVMH.
The French firm became the first European company to reach a market value of $500bn earlier this year as the share price went past the €900 mark. If that sounds like a lot for a single share, well, it’s by design. Even the shares of LVMH come in at luxury prices.
I don’t own shares in either company, but I see the potential for Burberry. If I bought in at its £21 share price, could it be like investing in LVMH earlier in its terrific run, say, in 2016, since when the value has risen five-fold?
In fairness, echoing LVMH has been in the works for a while. The French firm was considered a class above, in many respects, and so Burberry has taken steps like upping prices and removing discounts to increase the perceived luxury and boost margins.
Since new CEO Jonathan Akeroyd took the reins last year, this process has been accelerated. He has a target to improve sales of £2.8bn, up to £4bn in the medium term and £5bn in the long term. He wants to get there by emphasising the firm’s “Britishness” and expanding product ranges
Share buybacks
So far, progress is decent. Burberry released a good first-quarter earnings last week. Revenue beat forecasts by 3.5% and it looks on course to meet full-year forecast of 120p earnings per share. That gives a forward price-to-earnings ratio of 16, quite cheap compared to rivals LVMH (27) and Hermès (53).
Analysts expect earnings to grow, which will mean an increasing dividend too. The forward yield of 2.9% is much higher than both LVMH (1.37%) and Hermès (0.66%). The British firm announced £400m more in share buybacks this year on top of that.
While that sounds like a lot of shareholder value, Burberry lags behind on some key metrics. Margins at 18% are behind LVMH by some way at 25%. The difference here likely comes down to higher prices, which the company is looking to rectify.
Trenchcoats and scarves
Improved margins won’t be enough alone to hit those sales targets though. One of the keys will be expanding products. While Burberry has strong sales of its trenchcoats and scarves, its challenge will be to introduce a wider range without diluting the strong branding on these existing products. And it’s doing a lot in the high-margin bags category, which should be key.
Putting it together, there looks to be a compelling growth story here. Will it follow the outrageous success of LVMH? I wouldn’t like to say for sure, but I think given the cheap valuation and if I had spare cash, I’d buy in here to find out.
