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Burberry’s recent share price decline should not worry long-term investors

Why have shares in Burberry (LSE: BRBY), a British luxury fashion house, been performing so poorly? From a yearly high of 2,329p on 17 January 2019, the Burberry share was down to 2,099p a week later and hit a low of 1,918p Tuesday.

A peak to trough decline of 18% does not fit with the tone of the third-quarter trading statement, released on 22 January 2020. Overall, revenue and same-store sales growth had improved year on year. Revenue growth in the single-digits has been forecasted for 2020.

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The last forecast was for flat sales and weaker margins. The upgrade should have cheered investors, but prices continued to slide. They have recovered to 2,030p at the time of writing but still sit below the highs.

China focus

Burberry has 431 stores globally, of which 46% are in the Asia Pacific region, where it generates a majority (39.7%) of its revenue. Sales in China grew by around 15% in the latest quarter. This was enough to offset the decline in Hong Kong and increase overall regional sales by a low single-digit percentage.

The bringing of a Burberry runway show to Shanghai in April 2020, and the excellent response to Lunar New Year activities, were headline items in the trading report. Burberry plans to open flagship stores at a luxury hotel in Beijing, and a mall in Shanghai, and partner with Tencent, a Chinese conglomerate, to open a social retail store in Shenzhen.

Past lessons

The trading update was released as fears were growing about an outbreak of a new coronavirus in Wuhan, China, that began in December 2019. It is from the same family of viruses as the one that causes severe acute respiratory syndrome (SARS).

There were over 8,000 confirmed cases of SARS, in over 25 countries. The most heavily affected regions were China (5,327) and Hong Kong (1,755). The mortality rate was 9.6%.

According to Wang Tao of UBS, an investment bank, the SARS outbreak reduced quarterly GDP growth in China from 12% to 3.5%. Chinese retail sales growth fell sharply as did its stock market.

The response has been more transparent and robust this time around. However, China is more connected, both domestically and internationally, now than it was in 2003. There have already been more than 6,000 confirmed cases, and 130 people have died. 

Social media enables panic to be spread faster compared to 2003. Unease will likely grow until the outbreak peaks, which does not appear to have happened yet.

Burberry’s third-quarter trading report was clear that China, the epicentre of the new viral outbreak, was essential to its growth. It was a mistake to issue revised guidance, for positive sales growth, amid an event that will reduce fourth-quarter sales in China and make no mention of it. Global sales, in general, may take a measurable hit. World GDP fell by an estimated 0.1% due to the SARS outbreak, according to the IATA.

Looking ahead

Burberry stock, and markets, in general, will have more wobbles before this virus is under control. I would think that 2020 results for Burberry will be below the forecast, leading to more share price pain.

But remember that things were mostly back to normal six months after the SARS outbreak ended. Things will go back to normal after this outbreak. Burberry will get back on track. Its brand is a strong and luxury one. It is targetting the markets that make sense in the long run, which is good for long-term investors.

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James J. McCombie owns shares in Burberry. 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.