Summary
Burberry is among European luxury stocks large investors are shuffling to the bottom of the pile.
Yields and China
A mid-week ramp across developed market government bond yields has put a clutch of equity market sectors under the spotlight. Shareholders weigh how invested to remain in stocks as debt interest rates become more attractive. In the States, large swathes of the technology saw similar scrutiny, pulling down Nasdaq indices. In Europe, luxury sector names were under pressure. Shares in Burberry, Hermes (LON:0HV2), Kering (PA:PRTP), L’Oréal (LON:0NZM) and LVMH (PA:LVMH) traded sharply lower, and look set to see similar treatment for the remainder of the week.
Burberry (LON:BRBY), trading 5.9% towards the end of the session, fared among the worst, along with Gucci-owning Kering SA, which was hit for 5.8% in Paris. Notably, all are forecast to pay lower yields over the next twelve months than the US 10-Year Treasury, which earlier rose to 3.232%, its highest since July 2011.
Luxury a lightning rod
Market commentary generally backed the notion of continuing support from faster-growing and increasingly more profitable regions in Asia, particularly China. However, the likelihood that comparable periods could become more challenging was a concern.
With stock markets facing increasing challenges as market rates rise—corporate costs of capital and equity investment cases are being reassessed—the addition of a possible slowdown in China whilst it faces punishing tariffs from Washington, poses serious questions for luxury brands. As ever, those with the most baggage risk falling the most out of favour.
Burberry, which CEO Marco Gobbetti is trying to steer upmarket faces self-inflicted margin pressure as a 50% capex hike kicks in from 2019. A that time, its growth plan is likely to still be two years from bearing fruit. Like rival vendors, the group also recently faced negative publicity on sustainability, humanitarian and other ‘ESG’ concerns.
Still priced for perfection
After a 20% rally in 2017, partly on the back of fanfare from Gobbetti’s arrival and his projection of efficiency and growth to come, Burberry a more modest 7% price return this year points to increasing market caution. That’s despite the group posting quarterly sales ahead of expectation in July.
The stock has ceded about 15% since late August. The group left guidance unchanged at the time, though did note Chinese customers were tending to “move depending on currency”. That weighed on sales in Europe and the UK, with more shopping in Asia. Nevertheless, despite falling in recent weeks, the stock still looks priced close to ‘perfect execution’ levels. A ratio of Burberry’s share price vs. 2018 EPS trades at 24.88 times, close to larger, more diverse groups like Tiffany & Co (NYSE:TIF); and slightly above the giant LVMH.
Against a backdrop of modest free cash expectations for Burberry (see price/free cash flow yield in table above), the stakes are raised for the group’s half-year earnings, scheduled for 8th November.
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