Another strained quarter
Burberry (LON:BRBY) had another strained quarter. Was it poor enough to warrant sending as much as £640m of share value up in smoke on Wednesday? We doubt it. The decline looks like an overreaction to the group’s 2% retail sales fall. Down £16m against the same three months in the year before, Burberry has had better quarters. But Q3 left the group just £572m short of year-end sales projected at £2.23bn by March. Little wonder Burberry has calmly reiterated conservative operating profit guidance. The market’s own view of about £395m also remains reasonable. That would equate to 81 pence per share or £317m in attributable income. The group would need to have reported the emergence of near-catastrophic conditions in Q3 to post the net loss of almost £200m signalled by the shares today.
Outsized disappointment
Outsized disappointment explains the outsized share price punishment relative to likely earnings performance. It does seem as though some investors expected star quality—in CEO terms—to become evident soon after the storied former Céline exec Marco Gobbetti joined in July. High hopes were stoked by the long spells of double-digit sales growth he oversaw at the LVMH-owned house. As Burberry sales continue to ebb, some investors may feel like they’re being served a performance worthy of the ‘B-listers’ hired to launch recent Burberry events instead. Hopes of almost immediate traction were of course unjustifiably high. Note the stock was spirited almost 20% higher between early July when news of Gobbetti's appointment emerged and the group’s poorly received strategic review on 8th November. As the reality sets in over how long Burberry will take to ditch a flat-footed approach to digital, a sub-optimal franchising structure and an ever-nimble upmarket consumer base, disappointment thrashes the shares.
Watch Gucci
It’s tempting to see such angst as now having been expunged, leaving a firmer path for the stock this year, so long as Gobbetti has no further surprises in store. A major problem with this scenario though is that Burberry’s closest large competitor Kering-owned Gucci is widely expected to see continued strong organic growth after a 44% jump in 2017. That points to some market share loss being crafted into Burberry forecasts for 2019. The group’s current state of low-gear flux leaves it exposed to better co-ordinated rivals over the longer term.
Share price points
Wednesday’s stock dump dropped the price definitively below its always closely watched 200-day moving average for the first time in 2018. The stock has been struggling to avoid such a move since last July. A gap of unfilled offers all the way up to Tuesday’s 1772p close may see some play. But we would still expect the downside to attract over the medium term, targeting prices at least as weak as 11th July’s 1580p. That is near a more reliable support at 1567p.
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