Today’s results from Burberry (LSE: BRBY) highlight the challenging environment that it is currently facing. Indeed, the company has reported a decline in first half earnings of 12%, with pre-tax profit falling from £173.9 million in the first half of 2013 to £152.3 million in the first half of 2014. However, this fall is mainly due to currency headwinds which, when removed, mean that Burberry’s adjusted pre-tax profit comes in 6% higher than last time around.
While encouraging, Burberry’s adjusted first half earnings are slightly below analyst forecasts (by around 0.8%) and highlight that trading conditions remains challenging for the designer brand. Indeed, Burberry’s adjusted revenue growth of 14% in the half year perhaps masks a wider situation where demand for luxury goods has eased somewhat, which is at least partly due to a slowing Asian economy. As such, Burberry expects slight downward pressure on margins to continue for the full year.
Brand Loyalty
Despite this, Burberry remains well placed to benefit from the future growth of emerging markets. For example, next year it is forecast to increase earnings by an impressive 8%, which is ahead of the wider market’s expected growth rate. This shows that Burberry’s brand remains highly resilient and is able to withstand periods of slower growth in its key markets as a result of the relatively high degree of customer loyalty that it enjoys.
Valuation
While Burberry continues to trade at a premium to the wider market, with its price to earnings (P/E) ratio being 19.6 versus 14.1 for the FTSE 100, it appears to offer excellent relative value for money when compared to a company such as ASOS (LSE: ASC). Indeed, ASOS continues to trade on a P/E ratio that is difficult to justify based on its current performance and near-term growth prospects. For example, earnings for the full year are expected to be down 2% on the prior year, with the company posting a fall in profitability in FY 2013 and 2014, too. As such, a P/E ratio of 59.2 seems overly generous for a company that is set to post three years of falling profitability.
Looking Ahead
While the economic environment is posing difficulties for Burberry in its key Asian markets and its top and bottom lines continue to be hit by currency headwinds, it offers investors long-term potential for growth. While ASOS also offers the same, I believe it lacks the strength of customer loyalty and resilience that Burberry has spent decades building up. Furthermore, a P/E ratio that is three times greater than Burberry’s is hard to justify when earnings growth is distinctly lacking at ASOS.
