Burberry (LSE:BRBY) shares sunk on Thursday 16 November after the company’s Q2 results. There had already been signs that demand for luxury goods was fading and further headwinds in the form of inflation and a slowdown of the Chinese economy.
Ten minutes after the open on 16 November, Burberry shares were down 10%. So, if I had put £1,000 in Burberry shares two years ago, today I’d have £800. That’s because the fashion stock was already down 10% over the period.
However, I’d have also collected some dividends in the process, and that would have been worth around £45 according to my calculations. Collectively, my total returns would be minus £155.
Q2 earnings
In its earnings report, Burberry expressed concern about the impact of the slowdown in luxury demand on its current trading and potential effects on full-year sales.
Despite confidence in medium and long-term goals, the company acknowledged challenges in the wider market, similar to other major players in the industry.
The company’s interim results revealed a significant deceleration in sales growth in the first half, with a warning that achieving the previously stated revenue guidance for fiscal year 2024 might be unlikely if weaker demand — notably in China — persists.
In the first half, Burberry reported a 4% increase in sales to £1.4bn, but growth was hampered by foreign exchange headwinds.
However, the Asia Pacific region experienced a slowdown from 36% to 2% in the second quarter, with Mainland China sales falling by 8%.
The company indicated that achieving its full-year revenue guidance for March 2024 might be at risk in the current market conditions.
A buying opportunity?
If we’re investing for the long run, sometimes it can pay to invest in stocks after a significant repricing. After all, many of us aren’t investing for the end of the current fiscal year, which is when Burberry will deliver its FY2024 results.
So, is Burberry an attractive investment opportunity?
In the below table I’m looking at the forecast earnings per share for 2024, 2025 and 2026, and comparing it against the current share price to give me a price-to-earnings figure for the years in question. Investors are often willing to pay a premium now for growth in the future.
| 2024 | 2025 | 2026 | |
| EPS (p) | 115..5 | 128.7 | 139.2 |
| P/E | 13.4 | 12 | 11.1 |
With the forecast growth rate in mind, Burberry appears to be trading with a PEG ratio of 0.7. This ratio compares the price-to-earnings with the expected EPS growth rate. A PEG ratio below one normally suggests a company is trading below its fair value.
So, the above metrics suggest that Burberry could represent a good investment opportunity. It’s also much cheaper than many of its luxury peers. However, it’s certainly worth highlighting that there are risks to this investment hypothesis.
China is a huge market for the company — representing around 30% of revenue –, and its economic struggles could drag Burberry down. In the latest data, Chinese house prices fell by the most in eight years in October.
Nonetheless, it’s a stock for my watchlist. I’m certainly very interested.
