The Burberry (LSE: BRBY) share price has been the bane of my life lately. Or at least, the bane of my portfolio (sometimes I confuse the two).
The luxury fashion brand/retailer has been hit by the slowdown in China and general economic uncertainty, but made everything worse by losing its brand authority while making a failed tilt at the ultra-high net worth market.
Burberry shares are down 56.24% over 12 months and 63.67% over two years. I bought it in May after it started issuing profit warnings and averaged down several times. But I was still sitting on a 33% paper loss when I went to bed last night.
So I’m thrilled to see the shares have jumped 15.4% this morning (14 November) so far. But also baffled because today’s first-half results showed revenues plunging 22% to £1.08bn.
Luxury stock, bargain bin performance
Sales fell 24% in mainland China and 26% in South Korea, but Asia wasn’t the only culprit with a 21% drop in the Americas.
Burberry posted a £41m adjusted operating loss in the 26 weeks to 28 September, down from a £223m profit in the same period last year. It suffered a free cash outflow of £184m, up from £15m last year. There’ll be no dividend, but investors knew that. Last year they got 18.3p per share.
So what’s going on? Basically, investors liked what new CEO Joshua Schulman had to say about where Burberry went wrong, and how he can put it right.
Under his new ‘Burberry Forward’ strategic plan, Schulman is aiming to “reignite brand desire, improve performance and drive long-term value creation”. Frankly which CEO doesn’t want to do those things, but he does have a clear picture of Burberry’s failings as it “focused on being modern at the expense of celebrating our heritage”. By adopting “niche aesthetic” the group had “skewed to a narrow base of luxury customers”.
Diagnosing the problem is one thing, curing it is another. A good Christmas will help but given today’s economic uncertainty, we can’t rely on that.
Can it fly back out of the FTSE 250?
It’s not just words. Schulman has launched a string of product and marketing initiatives to reset the brand and has appointed new leaders. He also has his eye on the bottom line targeting £40m of annualised savings while working “to address inventory overhang and restore scarcity”.
He’s confident the group can get to generating £3bn in annual revenues “over time”, while rebuilding margins and driving cash generation. We’ll see.
Burberry has been with us since 1856 and every enduring brand will go through good times and bad. Sometimes it takes a crisis to deliver a much-needed reset. Let’s hope this is it.
Today’s low base gives Burberry massive comeback potential, as we’re seeing this morning. The shares look decent value trading at 9.78 times earnings.
There are rumours of an imminent offer from Moncler but I never buy on takeover talk and won’t add to my Burberry holdings today. This morning’s spike may fade as profit takers (or loss reducers) emerge. I’ve already got a pretty big holding. I’m sure I’ll be back in the black at some point, but it might take some time.
