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Can Burberry continue to outperform the FTSE100?

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In what has been a tough year for equity markets, some stocks have still managed to make gains. Luxury consumer goods firm Burberry [LON:BRBY], for example, has generated a 16% share price rise year-to-date. In doing so, it has outperformed the FTSE100 index by around 15 percentage points.

This is somewhat surprising, since the firm’s performance has been negatively impacted by tough trading conditions. For example, China’s zero-Covid policy meant that the business reported a 19% decline in comparable store sales in the country in its recent first-half results. In addition, the company continues to face an uncertain short-term outlook based on a slowing global economic growth rate.

Burberry set to change focus

Burberry’s latest half-year results, released last month, were well-received by investors. Under a recently replaced management team and refreshed design team, it laid out a revised strategy that ultimately aims to deliver GBP5bn in annual revenue over the medium term.

Key to the firm’s growth will be a renewed focus on leather goods, shoes, ready to wear and outerwear products, as well as an ambition to increase sales of accessories so that they account for more than 50% of total revenue. The firm will convert all existing stores to a new concept to attract and retain new customers. Meanwhile, it plans to double online sales as a proportion of revenue so that they account for 15% of total sales.

Burberry sees encouraging performance

The firm’s half-year performance was encouraging given the difficult operating environment it faced. Retail comparable store sales increased by 5%, with growth accelerating to 11% in the second quarter. Adjusted earnings per share rose by 15% at constant currency, with net operating expenses increasing by just 4%. This contributed to a rise in adjusted operating profit margin of 10 basis points so that it reached 16.3%.

Crucially, the company has been able to offset rising costs with higher prices. It is in an excellent position to continue this trend over the coming months due to its strong brand and the high degree of customer loyalty it enjoys. Steady, or even improving, profit margins may mean the firm stands out to investors while other consumer goods businesses struggle to maintain profitability as the global economic slowdown continues.

Can Burberry continue to outperform the FTSE100?

While an uncertain operating environment presents risks to the firm’s progress, its sound financial position means it is set to overcome them to capitalise on a long-term recovery. Its net debt-to-equity ratio currently stands at just 32%, while net finance costs were covered 22x by operating profit in the first half of the year. This provides ample financial strength to invest in new stores, refurbishments and e-commerce operations even in a challenging economic period.

The company opened trading today (1st December)  at 2,177p and has offered a year-to-date return of 18.7% and a one-year return of 22.6%. The company has a market capitalisation of GBP8.4bn and its shares have ranged between 1,473.5p and 2,193p over a 52-week period.

Trading on a forward price-to-earnings ratio of around 18x, Burberry’s share price is by no means cheap. However, its ability to grow margins in the current environment and capitalise on a subsequent economic recovery due to its solid financial position mean it is a relatively attractive investment proposition. As a result, further FTSE100 outperformance is on the horizon.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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