Burberry (LON:BRBY) investors carried on adding the stock on Wednesday as the run of recent positive news continues, lifting the shares to 2½-year highs at one point.
However, not all of these gains are entirely down to the fashion house’s own volition.
Burberry has also been among the large British firms to benefit from Brexit’s silver lining: sterling exchange rates that are favourable for UK costs and overseas price competition. This should provide the group with more time to execute the minimum transition it has planned; whilst the full-year currency translation advantage is now set at no lower than £50m. That was Burberry’s previous forecast before today’s upgrade to a benefit of £90m, assuming current rates last.
All the sensible operational boxes now look to have been ticked as well: the supply chain is now fed from a single inventory pool, in theory allowing the nimbler, more reactive decision-making required for an increasingly digital consumer; low-hanging retail customer services fruit have been picked, and the senior management structure is on the way to being optimised.
Notwithstanding fair business progress reported today though, we do not expect these measures to bring a radical turnaround in the medium term from the less-than-sparkling trend seen over the last two years.
We note the flat underlying retail result in the first quarter, which looks 4% higher if not adjusted for currency effects. It is weaker than 8%/10% Q1 2015 underlying and reported sales respectively.
On that basis, it seems fair to say that the group remains very much in defensive and remedial mode rather than at the beginning of a recovery phase.
Additionally, whilst the group flags moderate growth in the UK, China, where Burberry generated 39% of sales last year, remains key. Even more so in view of uninspiring growth in other regions.
Unfortunately for Burberry’s, its typical customer in China still has more luxury of choice than five years ago, given monthly core inflation rates there have been steady under 2% for almost five years.
Overall, we expect Burberry growth to remain more on the contained side at best, for the next year at least.
That makes the current market rating of 17 times next year’s earnings still too optimistic in our view, even if the market were to reject today’s updated profit guidance (£c. 413m) and opt for the higher end of the recent consensus range (£449m).
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