Burberry: An Opportunity To Get In Luxury, Cheap

seekingalpha01-29

Burberry stock has declined by nearly 50% since April 2023, making it an attractive entry point for investors.The company's recent growth slowdown, particularly in the Americas, has led to a reset of ...

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Since April 2023 the stock has been down -47.50%. In this article, we will discuss why this offers an attractive entry point in this deep value luxury stock, with attractive catalysts for good future share price performance. Data by YCharts Let's start with the beginning and discuss why the stock has been punished this much. Why is Burberry down almost -50%? Burberry is currently being perceived as the ugly duck of the luxury market. Data by YCharts The stock had been going sideways for years due to lackluster underlying financial performance (revenue has been around 2.5 billion GBP ($3.2 billion) since FY 2015), but recently, there was hope that the stock would be able to break out to new highs due to impressive figures after the COVID pandemic period. In FY2022 the company was able to impress the market with +20% revenue growth and in FY2023 the company grew again by +9.48%. Investors were hoping that a new growth trend was forming. Unfortunately, Burberry saw a massive growth slowdown in Q1 of FY2024, mostly driven by the Americas, with an -8% sales decline. And another growth slowdown of -10% in the Americas in Q2 FY2024. And total growth slowed to just 1%. In the latest trading update (posted on 12 January 2024) the company saw the decline in the Americas worsen to -15%. And total revenue growth declined to -2% at constant currency and -7% in reported currency. In short: Burberry seems to be returning to the mean and while revenue for the year should still come in around 2.7 - 3 billion GBP ($3.4 - $3.8 billion), it's not a growth story that investors get excited about right now. So the stock was definitely not worth the multiple expansion it was starting to get at the beginning of 2023. So the stock reset, as expectations have been reset. Burberry is still in a turnaround, and it still has to prove that it can grow. However, there are many positive aspects to the stock at the current price level that could make it an interesting investment, as I'll explain shortly. Attractive entry point from a valuation perspective Results might be resetting to the mean, but after two great years, that's kind of normal. It might not mean that something is wrong with the Burberry brand per se. It might just mean that the consumer is spending a bit less, after 2 years of spending its saved up COVID-money. Competitors like Capri Holdings also saw a sales slowdown. Capri Holdings had to confess a -8.6% revenue decrease during its Q2 FY2024. So the question now becomes: does Burberry deserve to be quoted at the same valuation as during the heights of the COVID-19 pandemic? Data by YCharts The company is now valued at only 1.6x sales, almost its lowest valuation ever. I believe Burberry, as a one of a kind British luxury fashion house with 70% gross margins and consistent operating margins of around 18%, is too cheap compared to the quality of the business. Data by YCharts The company also has a very solid balance sheet with more cash than debt and a solid free cash flow. As of Q2 FY2024, the company had 663 million GBP cash on the balance sheet and long term debt of only 299 million GBP. Giving it a net cash position of around 364 million GBP. And the company is able to generate around 700 million GBP in cash flow and more than 500 million GBP free cash flow in normal years. In short: this is not a company that's in financial trouble. It's just in a turnaround. And I believe the turnaround has promise. I don't see structural problems as of now. Solid CEO and creative director with experience in growing a luxury brand as potential catalyst Burberry's new CEO Jonathan Akeroyd, is the former CEO of Versace (he ran the company from 2016 to 2022). At Versace, he did a phenomenal job of growing the brand from $668 million to almost $1.1 billion during his tenure. He joined Burberry in April 2022. Right now, he is focussing on putting Burberry back on a growth path, with more focus on its British luxury profile and strong brand identity (something the company had lost the last couple of years). He also reinstated focus on leather goods, one of the best performers in the luxury category. And most promising: he is going to focus on e-commerce sales, which is important as it might drive gross margin expansion compared to wholesale sales (which are now 17% of total sales). The company also hired a new creative director, Daniel Lee. He worked for Bottega Veneta (owned by Kering (OTCPK:PPRUF)) during 2018 and 2021. He designed the Pouch clutch bag, which became the fastest selling bag in the history of the brand (per Wikipedia). During his time as creative director, the brand grew from €1.1 billion in revenue to €1.5 billion. We need to give Jonathan and Daniel some time for their vision of the brand to take hold. I believe that the medium revenue target of 4 billion GBP and long term ambition of 5 billion GBP are very achievable with these guys at the helm of the company. And of course, things will not always go smooth from the start. But they are just starting. Share buybacks as a potential catalyst Despite being in a turnaround, Burberry is still generating juicy cash flows. And thanks to its excellent balance sheet, this allows the company to buy back stock. Burberry shares outstanding overview (Koyfin) The company has already shown that it loves to buy back shares. Since 2006 the company reduced its shares outstanding from 506 million to 378 million today. And recently it executed a 400 million GBP share buyback. If it could do this every year (as long as FCF is above 400 million GBP), then that means that at the current market cap of 4.8 billion GBP, it could buy back almost 8.3% of its own shares per year. If it does that for 5 years, the amount of shares outstanding would drop to around 226 million. At its current share price, that would mean the company would have a market cap of 3 billion GBP. That would be less than 1x sales at current levels. This would make Burberry the cheapest luxury brand on the stock market! Solid LVMH results and interesting industry dynamics as short-term catalyst LVMH (OTCPK:LVMHF) could reassure the market on Thursday with solid annual results for fiscal year 2023. The company reported €86.15 billion of revenue, compared to €79.18 billion of revenue in the previous year. Analysts were expecting revenue of €85.83 billion. So a nice beat, despite a challenging macro backdrop. Also encouraging is that the company booked higher growth in Q4 than in Q3 2023. This might be encouraging for Burberry and the entire luxury market. Another interesting dynamic in the industry is consolidation. Tapestry is buying Capri Holdings for $8.5 billion (debt included). And most big luxury companies already form a cluster of multiple brands. Think of Kering or LVMH, which both own a ton of different luxury brands. LVMH's biggest acquisition recently was buying Tiffany in 2020 for $15.8 billion. Since there are less and less pure luxury brands on the stock market due to all of these acquisitions, Burberry is actually one of the few takeover candidates left on the market. I believe Burberry might be a great fit for a company looking to expand their reach and capabilities. A luxury company like Hermes for example is very strong in leather goods (the Birkin bag), but it really is not that great in designing clothes and having an attractive clothing line up. I might not be a fashionista, but in my opinion, Hermes could use some of Burberry's know how. And Hermes has a rich cash balance of almost €9 billion. It could buy Burberry easily. I'm not saying this will happen. Burberry might never become a takeover target. But it's nice to keep the industry dynamic in mind, and Burberry is now an easy snack for a bigger luxury player. Technical support levels look interesting Burberry technical support level (TradingView) Another positive catalysts for investors, is that the company is now trading at a very important support level that has been tested throughout time. And Burberry is actually a better company today than 10 years ago (revenue and FCF are higher and fewer shares outstanding) but the stock is still quoting at almost the same price. This looks like an interesting entry point for patient investors. Conclusion Burberry (BURBY) has faced a substantial stock decline of nearly -50% since April 2023 as it is being perceived as the underperformer in its market. The company experienced a growth slowdown, particularly in the Americas, leading to a reset of investor expectations. However, several factors make the stock appealing at its current valuation:  Low Valuation: Burberry is currently trading at one of its lowest valuations, 1.6x sales, not reflective of its unique British luxury status with high margins. Leadership and Direction: The appointment of CEO Jonathan Akeroyd and creative director Daniel Lee are a potential positive catalyst. Akeroyd's successful track record at Versace and his focus on brand identity, leather goods, and e-commerce make future growth more likely. Share Buybacks: Despite being a turnaround, Burberry continues to book strong cash flows, allowing for share buybacks, contributing to potential shareholder value creation. Industry Dynamics: Positive results from LVMH show that the fear over a slow-down in the luxury market might be exaggerated, and ongoing industry consolidation position Burberry as a potential takeover target. Technical Support Levels: The stock is trading at a critical support level, offering an interesting entry point for patient investors.  While challenges persist, Burberry's current valuation probably doesn't reflect its brand strength and potential future growth prospects. I have confidence in Burberry's new leadership and share buyback potential. Combined with an attractive entry point, I have to give this stock a buy rating as of now.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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