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Does 22% revenue growth make Burberry Group plc a hot fashion tip?

Luxury fashion chain Burberry Group (LSE: BRBY) has lost some of its catwalk swagger in recent years, largely due to falling sales in Asia as Chinese consumers retrench. So will today’s positive third-quarter trading update swing it firmly back into fashion? 

Sterling work

Today’s headline figure was an underlying 4% leap in retail revenue to £735m for the three months to 31 December 2016. Overseas revenues were given a further boost by the slump in the value of sterling, which means that earnings actually leapt 22% at reported FX.

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Obviously, that currency boost is unlikely to be repeated, and could even reverse now that markets are pricing-in a hard/clean/red-white-and-blue Brexit, which could hit future numbers. However, comparable sales rose 3%, with the good news that Asia-Pacific has returned to growth. Burberry was happy to report acceleration in mainland China and improvement in Hong Kong (although sales in HK are still declining), plus double-digit percentage growth in Europe, the Middle East and Africa (EMEIA).

Brexit Burberry

Britain is the real star, with “continued exceptional performance” as comparable sales grow around 40%, boosted by both domestic consumers and travelling luxury customers taking advantage of the crashing pound. Even France is improving. There was no Trump boost, however, with the Americas posting a low single-digit percentage decline, due to “uneven” domestic and travelling luxury customer demand.

In the fashion industry, image is all. Here, Burberry appears to be doing well. Its festive film has secured more than 22m views, its digital operation continues to lead the pack, and the brand remains strong. Investors who keep a closer eye on the back office fundamentals than front-of-house shenanigans will be pleased to see the company on course to make £20m of cost savings this calendar year, while noting that £77m of a planned £150m share buyback programme has now been completed.

Luxury valuation

These results came in ahead of expectations but the share price ticked up only slightly, perhaps because high expectations are priced-in, with the share price up 42% in the past 12 months. It currently trades at a luxury 22.6 times earnings, which is a bit high-end. The dividend yield is 2.32%, hardly compelling.

Burberry has recovered well from its share price slump in 2014 and 2015, even if the sterling slump can claim most of the glory for its post-Brexit bonanza. However, management deserves praise for its robust cost-cutting programme and successful growth strategies, which have helped drive a return to form in Asia.

The future looks promising, with forecast earnings per share growth of 7%, 7% and 10% over the next three years. Pre-tax profits of £433m in the year to 31 March 2016 are forecast to continue rising and to hit £520m three years later in 2019. My only quibble is that recent strong share price growth and the pricey valuation make Burberry more of a hold than a buy.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.