Like billionaire investor Warren Buffett, I really, really love a bargain. He famously said that “whether we’re talking about stocks or socks, I like buying quality merchandise when it is marked down.” It’s a tactic I always use when choosing the best FTSE 100 stocks to buy.
Burberry (LSE:BRBY) is one blue-chip stock I’m looking at following recent share price weakness. This Footsie share has plummeted 43.7% in value during the past six months.
Sure, the company has its problems. But do Burberry shares look like a great dip buy at today’s prices? Or should I leave them on the shelf?
Turnover In A Tailspin
Burberry’s share price decline comes at a time when consumer spending on luxury items is cratering. In fact, the British luxury fashion house has now lost two-thirds of its value in the past year.
Presumably, things could pick up at the next stage of the economic cycle. But there are no signs of easing conditions just yet. In fact, things continue to get worse for the company.
Latest financials showed retail revenues tanked 22% in the 13 weeks to 29 June. It was much worse than expected, and prompted Burberry to jettison its chief executive and suspend the dividend.
Based on current trends, the firm now expects to report an operating loss for the first half. Full-year wholesale revenues are tipped to plummet 30% too.
Burberry has parachuted in Joshua Schulman — formerly of Michael Kors and Jimmy Choo — to turn things around. But he’s the company’s fifth CEO in just over a decade, indicating just how deep its problems run.
Burberry’s brand power has lost much of its lustre, and its plan to target uber-wealthy customers has failed to pay off.
So what now?
Under its new chief executive, Burberry plans to make steps that include:
- “Rebalancing our product offer to include a broader everyday luxury offer and a more complete assortment across key categories.”
- “Refining our brand communication to emphasise more of the timeless, classic attributes that Burberry is known for.”
Fashion is famously cyclical. And so counting out Burberry — which, let’s not forget, has been making clothing since 1856 — could prove rather foolish. Appointing successful industry veteran Schulman might also prove a masterstroke in time.
The verdict
The problem is that things could get worse before they get better. Hargreaves Lansdown analyst Aarin Chiekrie notes that “a turnaround will require a lot of patience and work to fully leverage the group’s history and brand.”
It will also need a lot of investment, which will put further stress on Burberry’s stretched balance sheet. The firm’s net debt to adjusted EBITDA ratio was 1.4 times as of December. That was way ahead of its target 0.5 times to 1 times.
This scenario also means any hopes of a returning dividend can be kicked into the long grass.
Despite its share price collapse, the firm still deals on a huge price-to-earnings (P/E) ratio of 25.8 times. This isn’t the sort of valuation I’d attach to a company in Burberry’s current situation, so I’m happy to look for other contrarian stocks to buy today.
