Company Reports

We are reducing our fair value estimate for narrow-moat Burberry to GBX 1,680 from GBX 2,100 as the company reported a decline in revenue and profits for fiscal 2023/24. While full-year revenue and profits were modestly below our estimates, we factor in our reduced expectations for the recovery of brand appeal, given that Daniel Lee’s appointment failed to improve performance after 18 months in the chief creative officer role as well as a more challenging industry backdrop in the current year. Shares remain undervalued.

We are reducing our fair value estimate for narrow-moat Burberry to GBX 2,100 from GBX 2,460 as the company significantly reduced its full-year profitability outlook for the financial year ending March 2024. Operating profit is now expected to be within the range of GBP 410 million-GBP 460 million, down from the lower end of GBP 550 million guidance communicated in November 2023 with its first-half 2023/24 results, implying a 20% downgrade at the midpoint. We still view shares as cheap at current levels.

We maintain our fair value estimate of GBX 2,460 for Burberry as the firm reported weaker sales in the second quarter, pressure on margins, and warned that weaker luxury buying may weigh on full-year profits. We may adjust our full-year profit assumptions downward, but it shouldn't result in a significant change to our fair value estimate. We view shares as attractive at current levels.

We are maintaining our fair value estimate of GBX 2,090 for narrow-moat Burberry as the company reported solid first-quarter revenue on a rather easy comparison base. First-quarter comparable sales were up 18% (1% in the first half of fiscal 2022/23), driven by the Asia-Pacific region and notably China, where the comparison base against last year is easy (first-quarter fiscal 2022/23 sales in mainland China were down 35% due to lockdowns and were up 46% in the reported quarter). South Pacific sales were up 39%, while sales in Japan were up 44%, helped by the return of traveling Chinese consumers. Overall, Chinese buying globally was up by midteens versus 2 years ago (a better comparison due to COVID-19-related lockdowns in the prior year). Sales in Europe, Middle East, and Africa were also solid, up 17%, thanks to tourism. The Americas was weak, supporting our view of deceleration in this market after 2 years of unusually strong growth, helped by a number of nonrecurring tailwinds. Sales in the Americas were down 8% and sales to U.S. consumers globally were down by a mid-single-digit percentage.

We plan to adjust our fair value for narrow-moat Burberry to incorporate full-year results, after the company reported revenue 3.5% above our forecasts and a more-significant-than-expected improvement in profits. After yesterday’s price declines, we see shares to be approximately fairly valued.

We are maintaining our fair value estimate for narrow-moat Burberry as the company reported a deceleration in third-quarter sales growth, largely driven by lockdowns and reduced activity in China and some sequential deceleration in Europe, Middle East, and Africa. We view shares as largely fairly valued at current levels after a solid share price increase and peer outperformance last year.

We are maintaining our fair value estimate for narrow-moat Burberry, as the company announced solid first-half results and new goals and strategy for the business under new executive and creative leadership. After recent share price increases, the shares are trading around our fair value estimate.

We are retaining our fair value estimate for narrow-moat Burberry following the generally anticipated appointment of Daniel Lee as chief creative officer. We view shares as attractive at current levels, trading at a 20% discount to our fair value estimate in 4-star territory.

We are maintaining our fair value estimate of GBX 2,090 for Burberry as the company reported tepid sales in the first quarter, dampened by lockdowns in China and deceleration in the Americas.

We maintain our GBX 2,000 fair value estimate for narrow-moat Burberry as it reported fiscal 2021/22 results slightly ahead of our expectations. We see its shares as attractively valued, at a 30% discount to our fair value estimate and in 4-star territory. Our forecasts imply 4.5% average revenue growth post-2021/22 and operating margin scaling to 22% (from 18.5% in 2021/22), which we may skew a bit in the direction of stronger revenue growth and slower margin progression, given the firm seems to prioritize investment in the business. The company retained its midterm forecasts for high-single-digit growth at constant-exchange rates and meaningful margin accretion. We expect new CEO Jonathan Akeroyd, who joined two months ago, to continue building on the prior strategy, but a strategic update will be provided in November with interim results.

We are not making any changes to our fair value estimates for our luxury and apparel coverage list due to Russia-Ukraine armed conflict. The luxury industry’s exposure to the Russia and Ukraine is small, accounting for a low-single-digit percentage of revenue, by our estimates. We believe that the conflict is unlikely to dampen consumer confidence in China (primary long-term growth driver) or the U.S. (driver of growth in recent years). European consumer sentiment (low-20% of industry’s sales) may be affected, should energy-related inflation accelerate meaningfully as a result of conflict; however, Morningstar's view is that the likelihood of gas delivery disruption to Europe from Russia is low. That said, most luxury names in our coverage look expensive to us, and we would recommend investors await a wider margin of error for investment in the sector.

We are maintaining our fair value estimate for narrow-moat Burberry as the firm reported solid third fiscal quarter results with acceleration of full price sales and expected negative effect of markdown and outlet exits. Burberry also hiked full-year operating profit guidance to 35% in constant exchange rates with GBP 27 million currency headwind, an equivalent of GBP 500 million-GBP 515 million, which is already in line with our GBP 509 million expectation but higher than GBP 472 million consensus estimates, compiled by the company. We continue to see Burberry as one of the few slightly undervalued names in our luxury coverage (around 7% discount to our fair value estimate) as we believe its earnings growth should accelerate in the years to come as markdown exists are finalized in the next quarter, brand appeal seems to be solid (comparable full price sales of 18% in the first half versus 2019 levels and +26% in the third quarter), and better top-line growth bodes well for operating leverage. Although we expect some of the current industrywide tailwinds to dissipate (e.g. savings from foregone experiences) mid- to high-single-digit revenue growth in the next 3-5 years looks realistic.

We are not planning to materially adjust our fair value estimate for narrow-moat Burberry after the company reported a revenue and profit rebound in the first half of fiscal 2022. In the second quarter, the pace of the sales rebound decelerated; on a comparable basis, sales were flat with 2019 versus 1% growth in the first quarter, with comparable full-price sales growing 10% (up 26% in the first quarter). We deem this performance as decent, as it compares with 10% comparable quarterly growth versus 2019 for Moncler and Kering and 38% for LVMH’s fashion and leather division. Burberry expects the curtailment of markdowns and outlet channels to be finalized by the end of the year, which should lead to overall sales trend acceleration, given solid full-price growth trends. We are comfortable with our mid- to high-single-digit revenue growth projections for the company in the years to come, accompanied with operating margin expansion. In a largely overvalued luxury sector, Burberry shares present relative value, in our view, trading at around an 8% discount to our fair value estimate.

After a perfect storm in 2020, the luxury industry looks poised for a blue-sky scenario in 2021 as a strong sales rebound is driven by resilient luxury consumers' incomes, steady real estate, and strong equity markets as well as savings from previous coronavirus lockdowns, and the psychological need for people to reward themselves after a stressful time. As a result luxury share prices have rallied, leaving many industry players trading near record levels. Nonetheless, we could not identify structural changes in the industry post-COVID-19 that would justify sustainably higher growth and profitability, and hence, valuations. We believe the pickup in gross domestic product, or GDP, and luxury consumption in the U.S. is temporary. Although we expect Chinese consumers to continue driving the industry's growth, we don't expect post-COVID-19 acceleration, while the "common prosperity" drive by the Chinese government could temporarily hurt the industry through higher taxation and adverse sentiment over conspicuous consumption. Finally, although we expect online luxury sales to reach over 30% of the industry's sales over the next decade from low teens in 2019, we don’t expect this shift to meaningfully alter the industry's economics. Luxury companies are likely to preserve their pricing in the channel, thanks to growing control over distribution and the industry's inherent pricing power. While the online channel for the luxury sector looks more profitable than for mass apparel--thanks to higher average order values and lower return rates--the shift is unlikely to result in a major profit increase for companies that already have high in-store sales densities, such as LVMH's Louis Vuitton. Companies with lower sales densities, such as Hugo Boss, could benefit from the shift as long as they manage their store portfolios proactively.

We are maintaining our GBX 2,000 fair value estimate for narrow-moat Burberry as the company reported a strong rebound in sales in the first quarter of 2021/22. We view the shares as fairly valued at current levels.

We are maintaining our fair value estimates for H&M, Burberry and Hugo Boss following the controversies in China in relation to sourcing cotton from Xinjiang suppliers allegedly involved in forced labour. H&M and Burberry were among European apparel firms we cover that have spoken out against sourcing from the region, which caused frustration among Chinese Internet users. Hugo Boss was also sourcing from the region. As a result, H&M was taken off all major Chinese e-commerce websites, its physical stores can no longer be found on major mapping service applications, and two celebrity ambassadors have stopped collaborating with the brand. Burberry’s collaboration with Tencent to design costumes for the popular game Honour of Kings was cancelled.

We don’t expect a material increase in our fair value estimate for narrow-moat Burberry as the company reported better-than-expected retail sales in the third quarter ended in December 2020. Shares look fairly valued.

We are maintaining our fair value estimate for narrow-moatBurberry Group as the company reported solid trading trend improvements in the secondquarter. Although total sales for the first half of the year were just shy ofour estimates of GBP 898 million at GBP 877.7 million, this was primarilydriven by weaker wholesale (negative 38% for the first half versus negative 30% we expected)but better retail trends as retail sales were down only 6% in the quarterversus the 10% decline we anticipated. This was also significantly better than thecompany’s guidance of a 15%-20% decline in comparable sales. Retail comparablesales returned to growth in October, helped by continuing momentum across regions. Sales on burberry.com almost doubled in the second quarter.

We maintain our fair value estimate for narrow-moat Burberry Group as the firm reported a 48% decline in sales in the first quarter, ended June (49% down in constant exchange rates and 45% drop in comparable sales). This was slightly ahead of our expectations for a 50% drop in the first quarter as this period was highly affected by coronavirus containment measures and store closures. In June revenue declines eased to negative 20%, and mainland China and South Korea saw rises in revenue year over year (confirming the trend highlighted by peer The Swatch Group on July 14).

We are maintaining our fair value estimate for narrow-moat Burberry Group as the company reported full-year sales and earnings before one-time items that were better than we expected. We view shares as attractive at current levels, trading at a more than 20% discount to our fair value estimate.