Investors are welcoming confirmation that Burberry’s cost savings plan is on track. After a moderate start of £20m delivered in the year just ended, £50m is confirmed as the goal in the current 17/18 year with £100m annualised savings by 2019. Taxed and capitalised between 2016/17-2020 the scheme suggests about £200m of value (Net Present Value) assuming the annualised savings of at least £100m kick in as planned by FY 2019. That fits well with a satisfactory increase in free cash flow to £465m from £274m over the past financial year. We believe the average investor expectation was around £300m; another example of the somewhat overdone pessimism on the group that still lingers.
It also certainly helps that adjusted profit before tax, at £462m is £41m higher than in FY 2016, broadly matching the group’s expectation that the outcome would be at “FY 2016 rates”. What scepticism there is on Burberry (LON:BRBY) is predicated on the widely held assessment that its businesses are not adapting to the changing global environment as nimbly as peers and that this is at the root of the British group’s underperformance of continental rivals. It’s also clear that positive momentum from sterling weakness—particularly in, and from China—has a sell by date. The advantage will fade as sterling’s slow recuperation takes hold. (We’re already seeing something like this dynamic in the States). At least there were no new negatives reported in the APAC regions, and wholesale and licensing challenges remained broadly as recently reported. Some disquiet is possible however, from new issues that emerged in H2 from transitioning beauty into the partnership with Coty Inc (NYSE:COTY). An unexpected £18.6m more has been written down as sales unexpectedly flagged.
Overall though, whilst still not entirely convinced that the uprating over the last 18 months is quite justified by the level of growth Burberry is comfortable to project over forecast horizons, we’re inclined to agree that the group has turned a corner. One cautionary thought is that it’s possible some investors continue to position for potential M&A, possibly with Coach Inc (NYSE:COH)., as recently reported, which is not part of our main case.
The main positive takeaway from Burberry’s year in our view is that the business has been scrubbed up to almost an optimum state, under current circumstances, in readiness for the official entrance of Marco Gobbetti as CEO in July. Expectations of his capability are clearly founded on the double-digit sales growth trends at LVMH (PA:LVMH)’s Céline under his watch. Assuming, out of caution, just half of that is achieved at Burberry, it would still be better than the stagnation since 2014.
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