Venerable clothing brand that became a 21st Century sensation
GREAT business people dream about brands. They fantasise about creating something customers buy automatically; they pray for the resources to support such a product, and they enjoy visions about the money they can make if the world is as excited about the brand as they are. The history of business is replete with tales of nearly successful ventures, but when a brand hits the spot, the rewards can be endless.
The firm under the microscope this week, the British luxury goods manufacturer Burberry, is a splendid example of a long-established company which eventually spotted the potential of its brand and exploited that potential at the moment of maximum impact.
The fact that Burberry has been around for 156 years has not prevented it from being a great, overnight 21st Century sensation. In its present condition, it has only been a listed company for scarcely more than a decade. But as part of that 2002 initial public offering the company had a market capitalisation of £1.2m (€1.4m). Today, its value on the market is £6.3bn (€7.5bn). That is growth in any language.
Burberry wasn't always a great global luxury brand, even if it was a sturdy British institution which had the distinction of introducing the 'gabardine' in the 1880s. Its other early contribution to fashion was the 'trench coat' produced for the officers of the British Army in World War I.
The iconic Burberry check was invented in the 1920s and provided the lining for trench coats.
Burberry ceased to be an independent company in 1955, when it was taken over by Great Universal Stores. It was still a shareholder in 2002 when the decision was made to float it on the London Stock Exchange. But the growth was such that by mid-2009 the 'spun-off' Burberry itself was large enough to become a constituent of the FTSE 100.
The apparel labels have been notably successful but the group also markets a large number of perfumes. It also sells watches and eyewear and, of course, the iconic check tartan and leather handbags. The company has 440 directly-operated stores, over half in emerging markets. There are 200 retail stores and a similar number of concessions, with retailing accounting for 70pc of group sales. A survey not so long ago regarded Burberry as the fourth-fastest-growing brand in the world behind Apple, Google and Amazon. It was also named International Retailer of the Year.
The Asia/Pacific region is Burberry's largest market and accounts for £650m of the group's £1.8m sales, generating 85pc of its income through retail sales. Principal markets are Hong Kong, China, Singapore and Taiwan.
Meanwhile, sales in Europe contributed £550m to group sales, two-thirds being generated from retail sales. The Americas, consisting of Canada, North and South America, have sales of £430m.
Last year, group revenue came out at £1.8bn, up 24pc on the previous year but a staggering 60pc more than corresponding revenues two years ago. Operating profits at £377m were up almost 70pc of those in 2010. The company has a P/E multiple of 22 and a slim dividend yield of 2pc. Ten years ago its share price was 400p but it dipped to 200p following the financial crisis. Today, shares trade at 1446p, below its record of 1687p. Recent half-year results show the retail division performing well but the wholesale division appears to have some problems. However, the profit outlook for 2014 is optimistic.
The market has to be worried about China, where the emerging Chinese middle-classes have made no secret about their fondness for luxury products like Burberry. However, the Chinese government is planning a crackdown on conspicuous consumption and ostentation.
Will this put a stop to Burberry's gallop in the Far East and does the management have an answer if the market there begins to slip? Shareholders will watch with trepidation.
NOTHING IN THIS SECTION SHOULD BE TAKEN AS A RECOMMENDATION, EITHER IMPLICIT OR EXPLICIT, TO BUY OR SELL ANY OF THE SHARES MENTIONED.