The stock market has rebounded strongly since March and some popular FTSE 100 shares are up by more than 50%. Investors appear to be pricing in a return to normal but, for many companies, business as usual is still a distant hope.
We don’t know exactly what will happen as the global lockdown ends, so I’ve been looking for FTSE 100 stocks that should do well in almost any circumstances. The company I’ve chosen is luxury fashion brand Burberry Group (LSE: BRBY).
The best FTSE 100 share?
This FTSE 100 share has fallen by more than 25% so far this year, despite the recovery seen since late March. However, the latest update from Burberry suggests to me that the business should recover strongly from the pandemic.
History tells us that spending by wealthy consumers tend to recover more quickly in a recession. Although 60% of Burberry’s stores were closed by the end of March, they’re now starting to reopen. Early indications are that customers are happy to return. According to management, sales in mainland China and South Korea are ahead of the same period last year, and still rising.
We don’t know if the same trends will be seen when UK and US stores reopen. One potential concern is that stores in western markets get a lot of business from Chinese tourists. The surge in spending in China may mean these buyers are shopping at home as travel restrictions continue to bite.
Therefore, although US and UK stores may take longer to recover, I’m confident this FTSE 100 share will do well as Burberry’s star designer Riccardo Tisci can keep delivering desireable collections.
Two months of lockdown has left many businesses in a dire financial position. They’ve only survived by taking on extra debt and relying heavily on government support schemes.
Burberry isn’t in this position. The group went into the Covid-19 pandemic with £600m of net cash and an unused £300m credit facility. Sales have continued through the group’s website, providing limited income during this period. Despite this, Burberry said last week that it expects to write off £68m of unsold stock from its stores.
This isn’t great news, but Burberry’s luxury positioning means that profit margins are high. Excluding various Covid-19-related impairment charges, Burberry reported an operating margin of 15% last year, with a return on capital employed of 22%. These numbers are well above average for a FTSE 100 share. In my opinion, they highlight the high quality of this business.
Why I’d buy Burberry today
It wasn’t long ago that Burberry was trading at more than £20 per share. As I write, the share price is just over £15, a level we first saw in August 2013. In the seven years since, the company has continued to develop its brand and increased its sales by 32%.
If the firm can maintain its high profit margins, then I think we could see strong profit growth over the next five years. I don’t think this FTSE 100 share looks expensive for such a high quality business. I rate Burberry as a long-term buy at current levels.
Roland Head 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.