Comment: sell Burberry as China sputters
By Oliver Haill
Date: Wednesday 15 Jul 2015
(ShareCast News) - China's luxury market is not what is once was, writes IG senior analyst Chris Beauchamp and Burberry has seen its shares fall following its latest trading update, as concerns about a sales flop in Hong Kong take centre stage.
The recent turmoil in China's stock market is a symptom of the overheated growth that economy has seen in recent years.
Rapid growth has given way to a slowdown, and now investors are concerned that momentum has shifted from positive to negative.
Burberry aimed to strike a 'steady as she goes' tone in its update - as the FT's Lex column noted, 'still' featured five times, with 'continues' cropping up nine times.
Sales growth was down 12% year-on-year (on a LFL basis), with the biggest worry being Hong Kong, where trading was down by 10%.
Admittedly, the second quarter is never the most dazzling period, and the real impact of the gyrations in the major Chinese indices will be felt in the next quarter.
The push to move sales online is also a mixed blessing. Yes, it will make buying Burberry's products easier for many, but it also standardises pricing across the globe.
This potential hit to margins explains why the share price is down - the multiple on which Burberry trades (currently 21 times earnings) does not allow much room for a slowdown.
And yet, a slowdown is what we will get. Recent retail sales data was strong, and GDP numbers indicate that the economy still grew at the target rate of 7%, but economic expansion in the range of 4-6% is now much more likely over the next three years.
This slowdown should see a concurrent drop in consumer confidence and retail sales that leaves Burberry, and other luxury goods providers, in a very tricky spot.
It is true that the shares have corrected significantly since February, losing 18% as of 15th July. However I expect more downside since the latest trading update really provides little in the way of positive catalysts.
The chart does not encourage a bullish view. What we have is a steady succession of lower highs and lower lows, i.e. a classic downtrend.
Buyers before this week's trading update came in to defend the £15 level, but the selling has already eroded much of that bounce.
Once £15 is cleared on the downside I expect the shares to move towards the October 2014 low of £14, at which point I suspect we may witness another short-term bounce.
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