Burberry: From Trench Coats To The Trenches

seekingalpha09-04

Burberry's attempt to elevate the brand in recent years has failed. Price increases have shut out "aspiration" customers, while older, wealthy clients question the creative direction of the brand....

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Price increases have shut out \"aspiration\" customers, while older, wealthy clients question the creative direction of the brand....</p>\n\n<a href=\"https://seekingalpha.com/article/4718874-burberry-from-trench-coats-to-the-trenches\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Burberry: From Trench Coats To The Trenches</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nBurberry: From Trench Coats To The Trenches\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-04 18:05 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4718874-burberry-from-trench-coats-to-the-trenches><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Burberry's attempt to elevate the brand in recent years has failed. Price increases have shut out \"aspiration\" customers, while older, wealthy clients question the creative direction of the brand....</p>\n\n<a href=\"https://seekingalpha.com/article/4718874-burberry-from-trench-coats-to-the-trenches\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0128525689.USD","symbol_name":"TEMPLETON GLOBAL BALANCED \"A\"(USD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4718874-burberry-from-trench-coats-to-the-trenches","article_id":"2464322707","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/458541757/image_458541757.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2464322707","pubTimestamp":1725444349,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"When thinking about luxury fashion, brands have an awareness and strategy for aspiration customers and VICs . Aspiration customers tend to be younger clients looking to enter into the brand via lower priced categories. VIC's are older, much wealthier individuals and are vital for luxury brands due to repeated purchases, which results in a large portion of sales coming from this cohort. A luxury study from Bain found VIC's account for 40% of luxury sales globally, but only make up 2% of customers. VIC's are also more intellectual buyers, with a preference for fewer logos/vibrancy and more elegant \"silent\" luxury designs. Aspiration customers, on the other hand, are more likely to choose items with visible branding as a signal of status as a new customer. 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Price increases have shut out \"aspiration\" customers, while older, wealthy clients question the creative direction of the brand.After losing 75% of its market value, Burberry could make a compelling investment if we see a recovery in 2025. Insiders have been active recently in the open market.Burberry isn't changing their strategy entirely but making assortment changes, refocusing on their core lines like outerwear and making the brand more inclusive.Achieving FCF around £400m and EBITDA around £600m in 2-3 years time would make today's valuation around £2.3bn a screaming deal.emreogan/iStock Unreleased via Getty Images Introduction When investors think of European luxury brands, most will think of France/Italy, but if you think of 'British Luxury', there's only one soft luxury brand name that competes globally, Burberry (OTCPK:BURBY) (OTCPK:BBRYF). Like the rest of the industry, Burberry enjoyed strong demand throughout 2021-2023 but is now experiencing an industry-wide downturn and the lack of individual execution from Burberry has led to underperformance verses peers. Below, you'll see the extent to which investor sentiment has decayed over the past decade as Burberry struggles for identity. Profit warnings, sales slumps, competitive pressures and strategy/design criticism have hammed Burberry shares down to a £2.3bn valuation. At the peak in 2023, Burberry was valued at just shy of £10bn (Mcap). Google Finance In July, management suspended the dividend and warned; CFO Catherine Ferry - \"The slowdown experienced in Q1 2025 has continued into July. If this trend were to continue throughout the quarter, we would expect to report a H1 operating loss.\" Burberry Q1 Trading Update Same stores compared to last year were down across all regions double digits, with the chairman warning of a weak luxury environment globally. This further signalled to the market that Burberry's attempt to elevate the brand had failed and a bottom still isn't in sight. Bifurcated - Who's the target clientele for Burberry? When thinking about luxury fashion, brands have an awareness and strategy for aspiration customers and VICs (very important customers). Aspiration customers tend to be younger clients looking to enter into the brand via lower priced categories. VIC's are older, much wealthier individuals and are vital for luxury brands due to repeated purchases, which results in a large portion of sales coming from this cohort. A luxury study from Bain found VIC's account for 40% of luxury sales globally, but only make up 2% of customers. VIC's are also more intellectual buyers, with a preference for fewer logos/vibrancy and more elegant \"silent\" luxury designs. Aspiration customers, on the other hand, are more likely to choose items with visible branding as a signal of status as a new customer. Burberry has visible branded products and more creative, vibrant chooses for younger customers; however, rapid price rises has put priced them out. Furthermore, the new innovative design direction from Daniel Lee, may have damaged the product image with older wealthier clients who prefer quiet and elegant product lines. While the industry is struggling, this mix in cohort between aspiration (more sensitive to price/economy) and VIC's customers has caused brands to perform differently from each other. Google Finance Despite the tough environment across luxury generally, Prada (OTCPK:PRDSY) and Hermes (OTCPK:HESAY) have seen resilient demand, whereas Burberry has been a chronic under performer alongside Gucci (OTCPK:PPRUF). This is reflected in the share prices over the past 12 months. The top luxury brands suited to the top 1% (Chanel/Hermes) aren't as badly affected in the current macro environment due to their lower exposure to aspiration customers who are middle class and upper-middle class consumers. Burberry Chief Creative Office Daniel Lee has now been with the company for 2 years. Prior to this role, Daniel served as the Creative Director at Bottega Veneta. Questions remain over Burberry's creative product direction and if the more innovative designs and higher prices are confusing Burberry's customers. For example, look at the below - rubber shoes/trainers at £600. Are aspiration customers the target or higher-end customers? Google Search \"Burberry shoes\" The creative experimentation hasn't paid off, combined with misguided price increases forces customers away from the brand and into safer choices at the higher price point. Simply put, Burberry's attempt to \"Elevate\" themselves into the higher end luxury segment hasn't paid off. Burberry has struggled against more successful luxury brands over the years, and worldwide Google searches indicate fewer consumers looking online at Burberry's products. Google Trends However I'd argue Burberry still remains a key name in luxury, but it must correct course. The recent CEO change might be a good sign, but what does the new CEO (Former CEO of Micheal Kors and Former Brand President of Coach) bring to Burberry? Is the incoming CEO keeping the strategy the same? Chairman Gerard Murphy has confirmed the new CEO will not be making a significant strategy change, but rather Burberry is making an adjustment and rebalancing their assortment with more inclusive pricing. Investors have also been told the CEO change isn't a move into \"affordable luxury\" either. It would be interesting to see future Daniel Lee collections and how customers respond to them over the coming years, especially in calendar 2025 when analysts expect a recovery. My personal opinion is Burberry should refocus their marketing and product designs efforts on outerwear rather than trying to innovate in categories where they're less well known. This means refocusing on trench coats & jackets instead of outlandish shoes or bags that have a 30% higher price point from previous years. Guidance Level Indicates Cheap Valuation Bloomberg Terminal Based on the sell-side consensus above, analysts expect revenue to recover for FY26 which runs from April 1st 2025 - March 31st 2026, after a weak FY25 (this year). However analysts expect revenue in FY28 to remain below FY24 levels; hence investors looking at this name would probably consider a contrarian \"value\" investment rather than a compounder. EBITDA and FCF numbers in 2-3 years look pretty attractive based on today's valuation of £2.3bn (Market Cap). If we ignore capital leases and assume net debt around £160m (£600m debt - £441 cash) the EV is around £2.5bn. Based on the current valuation and consensus estimates, you get the following; - FY26 of £571m = Fwd EV/EBITDA 4.37x - FY26 of £270m = Fwd FCF yield on Mcap 12% - FY27 of £636m = Fwd EV/EBITDA 3.9x - FY27 of £437m = Fwd FCF yield on Mcap 19% To note, Burberry also an undrawn RCF of £300m maturing 2026 which can be used for a refinancing or as a safety net if things get worse. Net income looks pretty mediocre at £150-200m - however I'd argue FCF is probably the most important as it represents physical cashflow into the business that can be used for dividends or buybacks. The recent sell-off has prompted several insider buys. The three most noticeable buys were; Chairman - 20,000 shares @ £7.25 = £145k (16th July) CFO - 8,268 shares @ £7.20 = £62k (16th July) New CEO - 5,000 @ £7.63 = £38k (30th July) I'd argue Burberry offers attractive value at these levels and at least warrants being added to the watchlist. Conclusion Revenue was £3bn last year and is expected to fall 15% this year, however profits & margins are expected to suffer far more with EBITDA expected to fall 44% this year. Burberry tried to elevate their brand with an ambitiously new creative direction and much higher prices, which didn't resonate with customers. Furthermore, this change in pricing/product design couldn't have been more poorly timed. Burberry historically has a higher exposure to middle-income aspiration customers in comparison to the top global luxury brands, which is why they are introducing more pieces now at lower price points. However Burberry needs to be very careful they don't become too inclusive in their efforts to correct the ship. Management are also refocusing on their tradition core lines - outerwear, which is the right move in my opinion. Burberry retains a strong heritage as \"British Luxury\" and it's iconic checkered pattern is universally recognised among consumers. I think Burberry's valuation is compelling and offers a chance to invest at a time when the market could be bottoming within the next 12 months. It's a positive sign to see insiders buying into negative sentiment & uncertainty, potentially indicating management are optimistic about a 2025 recovery - but I'm still cautions on China, which might see negative GDP this year. A valuation of £2.3bn and FCF guidance in and around £400m in the 2 years, makes a serious proposal if Burberry can get back on their feet.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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