US Edition Burberry
£14.64-121p
Questor says HOLD
BURBERRY, the FTSE 100-listed luxury goods brand that has gone from “chavs” to China said yesterday its chief executive, Angela Ahrendts, was leaving to join Apple. Shares at the retailer tripled in price during her seven-year tenure.
Perhaps understandably, markets were unnerved by the news. Burberry shares slumped more than 6pc when markets opened. Ms Ahrendts is seen as the driving force, who, along with creative director Christopher Bailey, transformed Burberry’s fortunes, turning it into a global online retailer. Mr Bailey will take over as chief executive
Senior management departures are a red flag for investors. There is always the lingering concern that the chief executive is leaving before results take a turn for the worse: Terry Leahy exiting Tesco being a case in point.
So, should investors follow Ms Ahrendts and check out of Burberry?
The first half trading update is a mixed bag. Overall group revenue was up 14pc to £1.03bn in the six months ended September 30 and the revenue growth rate accelerated, from 8pc at the same point last year.
Retail revenue, which is responsible for two-thirds of the group total, increased by 17pc to £694m, driven by coat and bag sales in Asia and Europe. There was no detail on margins but, in the latest full-year update, adjusted retail operating margin increased to 17.8pc from 16.4pc the year before. New store openings, which are a key part of the growth strategy, were a net six in the first half, including two in China.
Wholesale is having a tougher time. Revenue, excluding sales from beauty products, was down 7pc to £244m in the first half. Burberry said it expected full-year wholesale revenue to be largely flat on the prior year.
Burberry decided to terminate a licence agreement for the sale of fragrances, so the beauty products division is now reported separately. Beauty sales, which include products such as men’s fragrances, were £51m in the first half. Management needs these to accelerate significantly in the second half to hit full-year targets of £140m.
The final piece of the revenue puzzle is licensed products, such as glasses and watches. Licences delivered £42m in revenue in the first half, down from £53m in same period last year.
However, bringing fragrances in house means £11m in licence revenue was lost from wholesale and is now reported under beauty so, adjusted for this, licence revenue rose 2pc on the same point last year. Management expects the full-year licence revenue to be similar to last year at about £82m.
Burberry is growing strongly in its core retail business and profit margins are improving. The group also has a good mix of online and high street locations across the world.
However, the shares reflect this – rated at 19.1 times 2014 earnings, falling to 17 times next year.
Burberry warned that in the second half the outlook is uncertain and currencies are volatile. Against this backdrop, the group has to deliver a strong second half performance to hit full-year revenue, profit and earnings forecasts (see table).
Questor thinks Burberry is a quality company but wholesale, which accounts for about a third of the business, is not really growing. Also the licensing division which contributes about a fifth of operating profit is looking fairly flat. Questor is reluctant to pay a high rating for a company firing on one, admittedly very strong, retail cylinder. Hold.