Burberry looks like riding out coming Brexit storm
To some, luxury brands are the biggest confidence trick in this era of consumerism. They point out that the product prices bear no relationship to manufacturing costs, being based on perception of exclusivity.
But to business people, brands are extremely attractive. They fantasise about creating a brand where customers pay a high price on a regular basis - and if it hits the jackpot, the rewards can be enormous.
Unless I am mistaken, Grand Met, the British conglomerate (later to merge with Guinness to create Diageo) was the first major firm to put values on its then brands, like Baileys Irish Cream and Smirnoff vodka. Suddenly, hundreds of millions of pounds in value could be found where none had previously existed.
Brands are such a part of modern business that only the completely foolish would dismiss them as a 'con-trick'.
One big British company has turned its brand into a special piece of magic and that quality may make it a possible sure-fire winner, whether the ubiquitous Brexit turns out to be hard or soft, smooth or frictional.
That company is the luxury goods concern, Burberry. The 160-year-old company was not always a global luxury brand, but it is a splendid example of a long-established company that spotted the potential of its brand and exploited it to the full. (Though the following fact has nothing to do with its current fashionable status, Burberry made an important contribution to Irish military history by inventing the trench coat, the de rigueur fashion item during the War of Independence.)
Just after the millennium, Burberry broke free from its parent of a half-century, Great Universal Stores, and floated on the London Stock Exchange. Today, the group has 470 outlets worldwide, sales of £2.8bn and a market worth of £7bn (€7.9bn).
But the key to its growth was that it transformed itself from a licensing business to a wholesale operation and is now mainly a retail concern, located in all the top-end locations around the world.
Asia Pacific and Europe account for almost three-quarters of Burberry's revenues. The China market saw luxury consumption decline recently for the first time, while in its US market the company's problem has been a dependency on discount outlets and their consequent low prices.
Recently, the group appointed a new CEO, its third in four years. This revolving door of senior management worries some investors.
In 2014, the CEO, Angela Ahrendts, moved to head up marketing for Apple.
She was followed by Chris Bailey, who had the dual role of CEO and creative director.
This proved less than ideal and the share price suffered.
Recently, he was replaced by Marco Gobbetti, who previously headed up the French luxury brand Celine. Bailey retains his position as creative director. Investors are hoping that Gobbetti can last the pace and deliver.
Today, the luxury-goods environment is challenging and Burberry group revenues were £2.8bn, down 2pc on the previous year. Profits before tax, at £395m, fell more at 5pc. The company generates strong cash flow, even after paying share buy-backs (£100m) and dividends (£164m). Interestingly, over the past five years, Burberry has paid £700m in dividends to its shareholders.
Cost savings are protecting short-term earnings, with the company maintaining tight disciplines on costs. It plans a reduction of £20m this year and expects £50m next year.
The shares, at £16.45, cannot be described as cheap but at the back of investors' minds is the possibility of a takeover bid. One, from a US rival, Coast, was rejected. Since the Brexit decision a year ago, Burberry was one of a small number of companies tipped to ride out the Brexit storm.
This is because it generates less than 10pc of its revenues in the UK and at the same time is a beneficiary of the weakness of the pound.
It might be worth a flutter if you like luxury goods and have faith in the Chinese consumer.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.