Great taste is always in fashion. Whatever one thinks about the taste of fashion house Burberry (LSE: BRBY), though, its shares have fallen deeply out of fashion in the City. Over the past year, the FTSE 100 company has seen its share price crash by 68%.
In other words, I could buy three Burberry shares for around the price I would have paid for just one a year ago.
I recently added the company to my portfolio, because I think it could turn out to be a deep bargain.
Why the shares have tumbled 68%
To begin, though, I will address the key issue. After all, a FTSE 100 share rarely if ever loses 68% of its value in one year for no reason.
The problems in the business were already visible in last year’s performance and did not start in the most recent quarter. However, even a quick glance at the quarterly update issued this week shows some of the problems.
Retail revenues fell over a fifth compared to the same quarter last year. Comparable store sales were at least 16% lower in all three of the company’s trading regions, showing this is not a localised problem. The dividend was axed and the chief executive replaced. Ouch.
Long-term potential
Still, as a long-term investor, I am willing to hold shares for years if I believe the investment case merits it.
I am not underplaying the risks Burberry faces from weaker luxury spending worldwide. That could get worse before it gets better.
However, I see that as a broad-based risk. I do not think Burberry is a turnaround case so much as a business suffering from sector-wide problems.
It might be squeezed in the middle market, as a company with products that are not cheap but equally not at the top table of the luxury world. Still, that has been true for decades – and the FTSE firm’s brand depth, British design heritage, and global distribution network have helped it do well. I see them as ongoing strengths.
Possible deep value
I reckon those strengths could prove to be valuable in future. On that basis, the current Burberry share price may turn out to be a real bargain in the long run.
Multiple directors purchased shares this week using their own money. I take that as a vote of confidence from people close to the boardroom. But while that reassures me, directors can make bad investments like anyone else.
What really strikes me here is that a proven business that has a lot going for it and has generated large profits in the past has seen its shares marked down in price so dramatically.
The company is sailing through stormy waters and I expect that to continue. But I think the ship itself, although it may need some different direction, is sturdy. I think the FTSE 100 share is priced for a worse future than I expect it to have.
