Shares in fashion retailer Burberry (LSE: BRBY) have slumped during the past two weeks due to growing concerns about a slowdown in China.
Over the past decade, companies like Burberry have profited significantly from the rise of the Chinese middle class, who have rushed to spend their new found wealth on luxury products, helping Burberry increase revenue by nearly a third over the past five years.
However, analysts are now starting to worry that the good times could be about to come to an end for Burberry and its peers. With economic growth in China moderating, and demand for luxury goods and products around the rest of the world potentially cooling, the outlook for the sector is not as bright as it once was, they believe.
Time to sell?
These concerns have resulted in investors dumping the company’s shares. Over the past 30 days, the stock has fallen just under 18%, underperforming the broader FTSE 100 by 14.4%.
I believe this weakness could be an excellent opportunity to snap up shares in the luxury retailer. Concerns about a slowdown in China are nothing new. There have always been stories circulating that the region’s growth is going to grind to a halt and Chinese consumers will stop spending. But despite these worries, Burberry’s growth hasn’t shown any signs of slowing down. I don’t expect the trend to end any time soon.
What’s more, even if growth does slow, the company has plenty of resources it can use to keep the wheels turning. At the end of fiscal 2018, there was £892m of net cash on the balance sheet, enough to fund the dividend for at least four years (at £170m per annum) if business grinds to a halt.
The current dividend yield is 2.6%, which is below the market average, but in my opinion, it is worth accepting the lower than average yield for the security offered by Burberry’s balance sheet. Management is also returning cash to investors via share buybacks.
And finally, even though the stock might look expensive, changing hands for 21 time forward earnings, I believe this is an appropriate price to pay for such a well-established brand.
Bleak outlook
Burberry’s global scale and defensive nature easily justify the stock’s high valuation. At the other end of the valuation scale, N Brown (LSE: BWNG) looks cheap, but I’m not rushing to buy this clothing retailer.
In the past, I have recommended buying N Brown for its dividend yield, which in hindsight was a mistake. Yesterday, the group announced it is cutting its dividend to try and preserve cash. Earnings are also falling as it seems N Brown is suffering from the same problems affecting the rest of the UK fashion retail sector.
At this point, it is difficult to try and figure out if N Brown is good value at current levels. Revenue and margins are sliding and the fact that only a few months ago management seemed optimistic about the outlook for the group seems to suggest things are going south fast.
It could be some time before the group manages to stabilise revenue. With this being the case, I’m staying away from the stock for the time being, even though it has fallen to the lowest level in over a decade.
