While the FTSE 100 gained ground on Wednesday, Burberry shares fell over 6% following news of poor first-quarter earnings. The losses were extended yesterday, with the stock dropping another 3%. But the FTSE 100 share still has a lot of promise, and this could offer an excellent buying point for investors.
Poor Q1 earnings
The pandemic has seen a drop in luxury demand, and this was clearly reflected in Burberry’s Q1 trading update. In fact, retail sales fell by 47% worldwide, with a 75% drop within Europe. The lack of overseas travel and the diminished number of tourists was a key reason for this fall.
But the update wasn’t all negative, and I believe Burberry shares may have been oversold following the news. Firstly, the Asia-Pacific region remained fairly unharmed, with just a 10% drop in Q1 sales. Mainland China also saw an increase in sales. This demonstrates that the brand is very established within Asia, and this is certainly an area for further growth. Furthermore, the firm has also already seen improved sales in June, which are only down 20% year-on-year. This indicates that a full recovery could be possible in the near future.
The fact that the firm has been able to cut costs recently is also an encouraging sign. For example, working at home has been deemed a success, and the company should therefore be able to cut office expenses. This restructuring should be able to save around £55m for the fashion brand. Burberry COO and CFO Julie Brown has also implied that these savings could be used for future marketing activities and digital campaigns, and I think Burberry shares could profit from this.
Environmentally and ethically friendly
In a world where fashion is a large contributor to global pollution, Burberry has endeavoured to ensure that it’s environmentally friendly. This includes plans to become carbon-neutral by 2022. The recently launched ReBurberry Edit is also a series of collections designed to make a positive impact on the planet, due to its use of sustainable fabrics. With an ever environmentally conscious society, a focus on sustainability has ensured that Burberry is a favourite among millennials. This certainly bodes well for the future of Burberry shares.
The shares are not cheap
Despite a 35% year-to-date fall for Burberry shares, they are still not cheap. For example, they have a price-to-earnings ratio of nearly 50. Even in comparison to costly luxury market brands, this is still very expensive. This implies major expectations of future earnings growth.
Nevertheless, as outlined above, I believe that Burberry is a very strong brand that should be able to withstand the current economic difficulties. It is also in good financial health, with plenty of cash and little debt. As a result, I’d use this dip in the Burberry share price to buy.
Stuart Blair 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.