Burberry spooked the market by announcing a downturn in second quarter retail sales. However, yesterday’s fall in the value of its shares seems disproportionate to the downgrade. This is especially true given the recent de-rating of the overall luxury sector. Lack of visible demand and the question of whether this is a blip has impacted short-term sentiment, leading us to downgrade our recommendation from buy to hold (not sell). It had been a buy since last December. But it is encouraging that Burberry’s management has taken action to limit the profit impact, demonstrating the increased flexibility of its business model. A clearer outlook would make us more positive again, as we still consider Burberry to be a great long-term growth story with significant growth opportunities both geographically and within its product mix.
Kate Calvert is a retail analyst at Seymour Pierce.
Burberry’s pessimistic announcement comes as little surprise. The company has seen exceptional growth both in sales and share value over recent years. Despite the brand’s heritage and core values, growth at these levels, within such a depressed market, is rarely sustainable. The brand’s current sales growth is being generated through new space; only when you look at the flat like-for-like-sales do you begin to get a true feel for consumer appetite towards the brand. Burberry has got to satisfy its current customers at the same time as trying to gain new ones. The long-term view is still optimistic, but the growth that it has experienced in recent years will not continue in the medium term. Businesses and investors alike should view Burberry’s situation with great caution. This is not a red emergency sign just yet. But it is an amber warning.
James McGregor is a partner at Retail-Remedy.