I went big on Burberry (LSE: BRBY) shares exactly one year ago (15 May 2024), but my purchase quickly turned bad on me. That’s gratitude for you.
To be fair, the FTSE 250-listed luxury fashion brand was already in a bad way, having plunged more than 50%. It looked like a decent entry point, but the slide had further to run. I averaged down in July, enticed by a collapsing price-to-earnings ratio, down from around 25 to under 10 times earnings, and a mighty 6% dividend yield.
I thought I was being clever. Instead, I got caught in another sell-off. The dividend died with it.
I cheered up briefly in November when new CEO Joshua Schulman unveiled his well-received ‘Burberry Forward’ strategy. For a moment, I was back in the black. It didn’t last. This year’s wobbles, including China’s continued slowdown and Donald Trump’s tariff war, pushed the shares down again. Last week, I was 30%-or-so in the red.
Rally on rotten results
Then came yesterday’s (14 May) explosion: the Burberry share price surged 18% in a day. I’m still showing a 9% paper loss, but that’s a lot easier to stomach. The stock’s down 29% over 12 months.
I called the rise insane in my headline for two reasons. First, because it was so steep. Second, because yesterday’s preliminary results did little to justify it.
Revenue fell 17% in the year to 29 March, with retail comparable sales down 12%. Adjusted operating profit limped to just £26m, or a reported £3m loss after £29m of adjustments.
Gross margins crumbled 470 basis points at constant exchange rates. There was £65m in free cash flow and cost controls are being tightened, but this was far from a turnaround moment.
Catwalk calamity
What gave Burberry shares wings? My guess is a combination of Schulman’s upbeat tone and a £100m cost-cutting plan that includes up to 1,700 job losses. That, and a bit of speculative froth.
Morningstar’s Jelena Sokolova took heart from improved second-half trading and Burberry’s renewed focus on outerwear and scarves. She sees scope for further recovery as the shares are still cheap. Even after the bounce, they trade on a P/E of just over 11.
Hargreaves Lansdown’s Susannah Streeter was more cautious, pointing to a fashion market that’s becoming more frugal with second-hand platforms like Vinted booming. Add in China’s shaky consumer confidence and a tough year for aspirational shoppers, and investor patience will remain thin.
Her thoughts chimed with mine. I was sorely tempted to cash in after yesterday’s leap. I expect this recovery to fizzle out. Schulman was optimistic last November and it didn’t last. Why should this time be different?
Volatility to come
The 17 analysts covering this stock have produced a median 12-month target price of 904p, which is around 7.5% below yesterday’s close. But those forecasts pre-date the surge — and clearly missed it — so I’m not putting much stock in them.
In the end, I decided to sit tight. I don’t like chopping and changing after just a year. But if I hadn’t already then committed to buying the stock, I wouldn’t consider buying it today. I see more stormy weather ahead and it’ll take more than a Burberry trench coat to get through it.
