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Is Burberry Group plc a falling knife worth catching now after sinking 10%?

Today’s interims from Burberry Group (LSE: BRBY) are accompanied by a strategy update from CEO Marco Gobbetti outlining his plans for the company and defending them at the same time. He is unapologetically moving the group to the very top of the luxury market, shunning everything else. It is a strangely passive-aggressive statement – he knows this is controversial – and its effectiveness can be seen in today’s share price, down 12% and still falling at time of writing. 

Luxury gap

Gobbetti is sharpening Burberry’s brand positioning, as he puts it: “We will establish our position firmly in luxury enabling us to deliver sustainable long-term value.” It is worth quoting more from his statement. “We will create compelling luxury leather goods and accessories to attract new customers. We will build on the strength of our apparel and re-energise it.  We will build our offer to provide a complete look for our customers, while continuing to simplify our ranges.”

The group will “rationalise non-luxury wholesale and retail doors”, in other words, close them, starting in the US. It will then work to refurbish its stores, enhance its luxury service and build on its digital success. Markets are no doubt worried about the “period of transition” as the group implements its new strategy, although Gobbetti expects the business to remain strongly cash generative.

Margin call

The market wants revenue hikes today, not a promise of sustainable growth and higher margins over time”, but I think this looks like a buying opportunity for long-sighted investors. The strategy has been tested with success in Japan and Spain. Luxury is where the money is, after all. After rising 33% in a year Burberry has looked expensive for some time and still does at around 24 times earnings, but today it is 12% cheaper.

The strategy update has blinded markets to the good news in today’s interims: underlying profits are up 28% to £185m with earnings per share (EPS) up 32% to 21.4p, free cash more than doubling from £75m to £171m and an interim dividend hike of 5% to 11p per share. City analysts are pencilling in 2% earnings per share (EPS) growth in 2018, leaping to 14% in 2019. I would buy into that.

Off the road

Now to another familiar name having a bad day: motoring, cycling and leisure products retailer Halfords Group (LSE: HFD). Its share price is down 5% at time of writing, after publication of its interims for the 26 weeks to 29 September, which showed a 9.8% drop in underlying profit before tax to £36.8m. Like-for-like revenues did climb 1.5% to £588.7m but this was overshadowed by the 1.3% drop in its Autocentres revenues to £77.7m and other disappointing figures such as the 10.8% drop in basic underlying EPS.

Retail gross margins also fell, as expected, primarily due to adverse foreign exchange impact. There were some bright spots, such as online sales up 10.8%, free cash flow of £31.1m, up £6.9m on H1 last year, and a 3% rise in the interim dividend per share to 6p. This is just one of many companies contributing to the UK’s record £28.5bn dividend jackpot.

These are tough times for retailers, and Halford has struggled since Brexit. Today’s results will offer little comfort, but at least they did not come as a surprise. The stock is trading at the same level as five years ago and revenue, profit and EPS forecasts suggest little respite ahead. The dividend is still motoring, now a forecast 5.5%, covered 1.6 times, but approach with due care.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.