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Why is the Burberry share price up 20% so far this year?

Image source: Getty Images.

2018 is shaping up to be another good year for fashion firm Burberry (LSE: BRBY). The company’s share price is riding high as the luxury fashion house makes good progress on its turnaround.

Gobbetti

Under Marco Gobbetti’s leadership, Burberry is going through a wide-ranging overhaul as it seeks to improve its financial performance.

Gobbetti, who replaced Christopher Bailey as the company’s chief executive last year, has brought with him more than 20 years of experience in the luxury goods industry. He has a proven track record of developing and executing effective operating and growth strategies, and had most recently overseen robust double-digit sales growth atLVMH’s Céline.

His most important move at the Burberry so far, was to move the brand even further upmarket. As part of the company’s new strategy, Burberry is aiming for a more exclusive positioning, as it seeks to deliver a more complete wardrobe offer for affluent consumers who want a distinctive British look.

Meanwhile, the company has stepped up cost cuts and an efficiency drive, and is on track to deliver cumulative savings of £100m by the end of this year. In another major development, Burberry has partnered with online marketplace Farfetch as it seeks to expand the brand’s distribution globally and further strengthen its e-commerce presence.

Flat sales

These big changes have yet to deliver a significant improvement on its top-line performance, however. Retail sales were broadly flat in the 13 weeks to June 30, as growth in Asia Pacific and the Americas was offset by weaker tourism demand in the UK and Europe.

And due to big investments needed to reposition the brand further upmarket, its bottom-line is forecast to dip slightly in the near term. City analysts currently expect underlying earnings to drop 4% in 2018/19, before making a 6% recovery in 2019/20.

Encouraging progress

Elsewhere, generic drugs maker Hikma Pharmaceuticals (LSE: HIK) is another stock to watch out for. Shares in the company have gained more than 40% since the start of the year, following recent successful product launches and encouraging progress to grow sales by enhancing and investing in its pipeline of new drugs.

Although core operating profit dipped 8% to $386m in the last financial year, amid increased competition for some of its injectable medicines in the US, the company’s branded drugs division continues to show resilience. Profitability in its branded business had remained stable, with core operating profits of $114m.

Fast-growing markets

Looking ahead, City analysts expects resilient demand for its branded portfolio of drugs, together with recent product launches, will drive sales growth over the next few years. Longer term, Hikma’s exposure to fast-growing markets in the Middle East and North Africa and its focus on affordable medicines puts it in a strong position to benefit from long-term sustainable growth in the health sector.

But it’s not just on the top line that the company hopes to deliver improvement — it’s also taking aim at its high cost base. Initiatives to improve operational efficiency are being rapidly implemented, as it seeks to defend margins from pricing pressure.

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Jack Tang has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry and Hikma Pharmaceuticals. 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.