Last time we looked at fashion retailer Burberry (LSE: BRBY) we called it a our Short of the Week. Our rationale at the time was that the impact of the coronavirus on the East Asian markets, including the closure of Burberry’s chain of fashion stores in China, was going to hammer the share price. We were proved correct.
We shorted Burberry on 21 February. At the time the shares were trading at 1870. We stayed short on the stock until the shares finally rallied on 24 March when we exited at 1200 (+36% without leverage). At that time Burberry’s European markets had entered lockdown but there were signs that some Asian markets were reopening.
Burberry shares have staged a mini rally
Burberry shares have staged a mini-rally since then but it has yet to break above 1475. The market seems to be pricing the stock at around 1300-1450.
The directors or Burberry including chief executive Marco Gobbetti, said on 24 April they would be taking a 20% reduction in their base salary and fees until June. This will be donated to the Burberry Foundation COVID-19 Community Fund.
Burberry also said it was retooling its factory in West Yorkshire to start making PPE kit for medical staff. The company has also donated over 100,000 pieces of PPE to date.
But let’s cut to the chase: what likelihood does Burberry have of staging a rally in the near term? The fact that it has re-tooled a factory is making us think that it is not expecting major demand from European markets in the next few months and we’d agree with that.
Burberry is one of 34 stocks on the roster for The Armchair Trader’s own Recovery Challenge stock picking competition, sponsored by AvaTrade, and which is seeking to help raise money for the UK’s National Health Service. This closes on 5th May.
Burberry is showing signs of financial resilience
Burberry is showing financial resilience in the face of the crisis: the company says it will continue to pay its own staff and will not be taking government support. This points to a well cashed-up company with diverse international operations, which we like.
Investors will still need to wait for preliminary results, which have been delayed by eight days, and we won’t see anything solid until 28 May. When we get these they won’t provide a good indicator of where the company is going as they will reflect an historic environment which isn’t keeping up with events.
What will be crucial for Burberry shares is going to be the speed at which the company gets its retail network up and running and sales coming in again. The May results won’t provide much of an indicator of that. We think that just as Asia dragged the company down in February, so it will be the Asian markets, which are opening up again, that will be the saviour for the stock.
Luxury brands are already re-launching sales campaigns in China, which is a crucial market for Burberry, and this is where investors need to be looking. Burberry recorded 1.38 million visitors in engagement with its live-streaming debut of Tmall and sold out of 60% of the products it was featuring in China, including handbags and earrings.
“In the past two months, we have seen a visible change in the behaviour of Chinese consumers,” said Josie Zhang, president of Burberry China, on 13 April. “We are very happy to be able to connect with so many consumers with live-streaming on Tmall. Consumers are eager for new things, and for us, when some consumers are unable to experience off-line boutiques because of the epidemic, live-streaming happens to be a safe and exciting way to bring them fresh experiences.”
Luxury brands are reporting across the board gains in the China market, but luxury consumer confidence is still down, according to China Luxury Advisors, an independent consultancy. A key concern for Chinese buyers is going to be the availability of products from fashion houses in Europe, which still use European factories, especially if they are being turned over to PPE manufacturing.