Scanning the FTSE 100 for potential buying opportunities, I was drawn to Burberry (LSE: BRBY) shares.
It’s been easily one of the worst performers on the UK’s premier index in the current year.
Let’s dig into what’s happened, and see if there’s enough meat on the bones for a potential recovery.
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Volatility hitting hard
Burberry shares are down a mammoth 66% over a 12-month period from 2,180p at this time last year, to current levels of 737p. In 2024 alone, they’re down 47% from 1,416p at the turn of the year, to current levels.
It’s not hard to identify the recent struggles of one of the most recognisable fashion brands in the world. Economic volatility across the globe has hurt many sectors and firms, and luxury fashion and Burberry have been impacted.
Rising inflation, a slow down in growth in key markets, such as China, and a decrease in spending in turn, has hurt the business.
In its latest update, a Q1 report released on 15 July, the business said store sales fell 21% compared to the same period last year. This was on the back of multiple profit warnings prior to this update. In fact, the firm is on course for an operating loss for the current half year.
Recovery or continued decline?
I’m an optimist, but even Burberry shares aren’t exactly getting my juices flowing. Yet, the fact is that its brand power, wide reach, and potential for growth are exciting.
The last point could be the key to any recovery. With such a strong presence and a past track record of success in Asia, one of the world’s wealthiest regions, there is potential for earnings to recover in the longer term. This is linked to growing wealth in this area. However, past performance is never a guarantee of the future.
From a valuation perspective, I must admit Burberry’s current valuation is tempting, as the shares trade on a price-to-earnings ratio of just nine. For context, the historical average is over 22, so the shares are in bargain territory.
What about returns? Well, when a share price slumps, the dividend yield is pushed up. However, Burberry recently announced it is halting payouts, at least for now. So there’s one less thing for me to add to the pros column as part of my investment case. However, as dividends are never guaranteed, this isn’t something I couldn’t foresee coming off the back of a turbulent spell.
My verdict
I reckon once volatility cools, Burberry could get back on track, earnings could increase, and the share price rise once more. This is if interest rate cuts occur, and Chinese economic issues subside.
It’s a long road ahead, in my view. As a Foolish investor interested in long-term investments, I would be lying if I didn’t say I was tempted.
However, I reckon my money is better invested in what I’d consider better options at present to help me build wealth. But I’ll certainly keep an eye on developments, and may revisit my position soon.
