Share Watch: Faith in fashion keeps Burberry a cut above rest around world
In the weeks before Christmas, good sense is often hard to find. While there is a crude (even crass) commercial logic behind the phenomenon we now know as Black Friday, the on-going insanity of the world of fashion will remain a mystery for me. (If all my acquaintances immediately mutter: 'We noticed', I suppose I cannot blame them.)
The fashion trap may be one of the biggest confidence tricks in this era of consumerism and provides one explanation why so many people with no shortage of money are prepared to lay siege on high-end fashion houses and pay prices for goods whose value is based on little more than the perception of exclusivity.
Like it or not it is part of modern business and only the foolish investor would ignore the opportunities, so this week we are looking at Burberrys, the UK fashion house which produces clothing, beauty products and accessories.
The company has been around a lot longer than many suspect. Established in 1856, it has invented and patented gabardine, a breathable waterproof and hardwearing fabric. I have no strong evidence the intrepid explorer from the Dingle peninsula, Tom Crean, was sporting some Burberry gear in the South Atlantic but his boss, another Irishman, Ernest Shackleton is said to have kept sleet and snow at bay with his Burberry outerwear.
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As an investment target Burberry only came into its own when it broke away in 2005 from the mighty Great Universal Stores and listed on the London Exchange with an initial valuation of £1.2m, which is now £8bn (€9.6bn).
Within seven years it was a FTSE 100 company. It has 430 stores, 44 franchised operations and employs 10,000 people worldwide.
There has been chopping and changing on the board over the years but the group appointed Marco Gobbetti as chief executive a couple of years ago and Ricardo Tessi, a former Givenchy designer to the critical (for luxury fashion) position as chief creative officer.
Two years ago Gobbetti announced a 'transformation strategy' to re-energise its product offerings, expand its digital reach, close secondary stores and redesign others. It expects revenues and profits to be stable until 2020 and then accelerate to high double digits. This will require capital expenditure to double to £200m a year. Tessi will lead its 'creative transition' and so far the company's bet on him appears to be paying off, but he still needs to prove he can take on Gucci.
Burberry's main markets are the Asia Pacific region including China, Singapore and - before its recent upheaval - Hong Kong. The region accounts for more than 40pc of Burberry's sales and understandably any trade war will present it with a problem.
The UK luxury brand is weathering the global headwinds better than expected. Last year group revenues were £2.7bn, more than double that of a decade ago. Pre-tax profits were £470m with a forward P/E multiple of 23.
Its shares surged as six months earnings beat estimates and it now trades at £20.70 (€24.80) but still below its yearly high of £23.60 The dividend yield of 2.2pc is not high enough to make an income case for the shares, but Burberry has been returning excess cash to its shareholders with a buyback programme of £550m (€660m). Its cost reduction plan saved £100m by the end of last year and the company anticipates this will increase.
However, Gobbetti faces some difficult problems.
Last year the fashion label angered environmental campaigners when it revealed it destroyed £10m worth of perfume products, unsold clothes and accessories to prevent them from being sold cheaply. Under pressure from campaigners, the company decided to look at alternative ways of offloading surplus goods.
The luxury sector is undergoing a period of consolidation and Burberry could yet be part of it.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.