Yesterday was bad for the FTSE 100 luxury brand and retailer Burberry (LSE: BRBY). Its share price fell over 8% as its CEO, Marco Gobbetti, stepped down to pursue other opportunities. Gobbetti’s leadership over the past five years has been a positive for Burberry, whose stock price doubled over the period.
Uneven performance
As an investor, however, I am not too nervous about the latest share price drop. While it is true that the Burberry share price has performed well over the last few years, it is also true that its revenues have been declining. Its bottom line has also fluctuated. This may or may not have had anything to do with top management decisions. Sometimes, like last year, it is just the broader conditions at play.
Better times ahead for Burberry
And these broader conditions are clearly improving. While the company did suffer a setback last year because of the pandemic, it started seeing improvements by the final quarter of the financial year. Its sales across comparable stores grew by a huge 32% from the year before.
Further, it said that China and the US were among the countries to contribute to this growth. I think this is good news because both economies are expected to do well this year. And in good years, consumers are more likely to make luxury purchases than in others.
Bringing dividends back
Burberry is also back to paying the dividend it did in 2019. This reflects its confidence in the post-Covid-19 market. Its dividend yield at 2% is small, so income from the stock is not my sole reason for owning it. But I like the dividend rise, because to me it reflects Burberry’s assessment of the future. And indeed, its outlook is strong. The company expects revenues to grow by high-single digits on average in the medium term.
Its price-to-earnings (P/E) at around 22.5 times also looks far less steep now than it has in the past months. This means that we are looking at a stock that is reasonably priced right now and has a positive future.
Labour woes
I am, however, worried about the allegations of forced labour against one of Burberry’s sub-contractors in Italy recently. Last year, online fast fashion brand boohoo faced similar allegations about its suppliers’ factories in Leicester. Despite robust performance and acquisitions of fashion retailers like Debenhams and Oasis last year, its share price has never gone back to earlier highs.
Will Burberry meet the same fate? Only time will tell how this story develops. In boohoo’s case, the company had been warned earlier of such practices but had failed to act. In Burberry’s case, the sub-contractor has already been arrested, which I think relieves the trench-coat manufacturer of the responsibility of investigation.
What can happen next for the FTSE 100 stock
I think it is possible that the Burberry share price can keep making gains from here. Labour related malpractices are fast becoming a thorn in companies’ sides, but they need not remain so if companies act fast and responsibly when required. I may buy more stock at this price.
