The Burberry (LSE: BRBY) share price was heavily in the red on Thursday morning as investors reacted negatively to the company’s latest set of interim results amid a global slowdown in spending on luxury goods.
I think this reaction might be overdone.
Big slowdown in sales
Now, don’t get me wrong — news from the FTSE 100 member that comparable store sales growth had fallen to 1% in the three months to the end of September was never likely to go down well with shareholders. In the previous quarter, this stood at 18%. The biggest drop in sales occurred in the Americas.
Somewhat unsurprisingly, this has led management to issue a bleak outlook. If this sort of performance continues, the company believes it is “unlikely” to hit its previous revenue guidance for the current financial year. Should this happen, adjusted operating profit will come in at the lower end of the range expected by analysts (£552m-£668m).
However I look at it, this is quite a change in fortune considering that the luxury sector in general enjoyed something of a purple patch earlier in the year.
Having lost almost 40% of its value in the last six months, however, that party has well and truly ended.
Opportunity knocks
There’s certainly an argument for saying the Burberry share price could have further to fall. While inflation is moving in the right direction, general economic sentiment remains fragile at best. Discretionary spending on the sort of products the company makes can easily be shelved for a while longer.
On the flip side, there are a number of reasons why I see this as a potential opportunity for Fools like me.
First, this remains a coveted brand, particularly in Asia. In fact, the growth of the middle class in this region should continue to act as a tailwind for the company going forward. From this perspective, the current slowdown is just noise.
Second, and as mentioned above, the drop in sales is not restricted to Burberry. In other words, there doesn’t appear to be anything seriously awry at this company compared to peers. The same thing has happened to French giant LVMH. Back in October, it announced revenue and profit for FY24 would likely come in “substantially below expectations“.
Sorry Burberry, you’re not special in this respect. And that’s a good thing in my book.
On a related note, the interim dividend was raised 11% to 18.3p. Such a hike suggests CEO Jonathan Akeroyd and co are pretty confident of being able to ride out this storm.
Obviously, there is always the caveat that income from any listed company can never be guaranteed.
Quality… going cheap
Away from current headwinds, this business has long boasted the sort of fundamentals I look for. High margins? Check. Above-average returns on the money it invests in the business? Check. Strong balance sheet? Check.
This makes me think that a forecast P/E of 15 before markets even opened already look cheap. It’s certainly a lot less dear than the five-year average of just under 22.
Existing holders won’t be cheerful about today’s fall. Just like premium drinks firm Diageo last week, however, I regard this as potentially a great entry point for patient contrarians.
