We maintain our fair value estimate for narrow-moat Burberry as it announced weak first-half results and provided some insights into its turnaround plan. Shares are trading in 5-star territory with 80% upside to our fair value estimate. Although it’s a challenging task to execute a turnaround amid tough macroeconomic conditions, we are positive about the strategy and its early implementation while the valuation remains undemanding.
We are encouraged by Burberry’s focus on areas where the brand is strongest, namely outerwear and scarves. We previously argued that these areas, which differentiate Burberry from its peers, are not emphasized sufficiently. That said, these products contribute around 40%-50% of revenue by our estimates and wouldn’t, alone, move the needle for a brand turnaround. Management’s view is that they should provide a positive halo effect for the rest of the range. We’ve long highlighted that Burberry’s disadvantage is a relatively small contribution from products where its brand is the strongest, but we view the renewed focus on them as positive. We also support the desire to appeal to a wider consumer audience versus a niche, fashion-driven strategy the brand was pursuing before.
The company’s take on pricing makes sense to us. Burberry intends to raise prices selectively upward for products with high brand strength (outerwear) while maintaining entry price points and resetting pricing for cheaper products such as polo shirts and leather (an intensely competitive area where the Burberry brand isn’t strong) to where they were 18-24 months ago. The company is not moving toward accessible luxury offerings and is largely maintaining its store footprint.
Cash flow was negative £184 million in the first half, attributable to a 20% revenue decline and operating losses. The company is addressing cash flow concerns through a one-time inventory clearance and previously announced dividend suspension.
Key Morningstar Metrics For Burberry BRBY
• Economic Moat: Narrow
• Morningstar Rating: 5 stars
• Fair Value Estimate: £13.30
• Morningstar Uncertainty Rating: High
• Sector: Consumer Cyclical
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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