This short is all about the coronavirus really. Burberry (LON:BRBY) is a major purveyor of luxury goods to the East Asian market, and that market is currently paralyzed by the coronavirus, which currently is a matter of major debate among investors.
Burberry shares: it’s all about the coronavirus
Let’s start with the coronavirus itself. Several markets are allowing themselves to be driven on the back of news about the coronavirus, but reporting is heavily reliant on any figures put out by Chinese health authorities. Other Asian health authorities are more trustworthy in their level of transparency – take Korea for example – but investors seem to be taking everything the Chinese government tells them as gospel.
China has a vested interest in downplaying the numbers while at the same time taking steps to ensure that the spread of the virus is contained. The quarantine of Wuhan seemed like an over-reaction when it was first announced, but the Chinese were obviously only too aware of how far the virus had actually spread, versus the numbers they were reporting.
Burberry has long relied on sales in East Asia, and especially in China. Beyond that, it has also sold further goods to Chinese tourists visiting western fashion capitals. That market is in almost total lockdown.
Burberry sales were hit by Hong Kong riots
Burberry had already been suffering following the riots in Hong Kong, and this had slowed Asian sales considerably. In Q3 the company had been forecasting sales growth in mainland China of 10-20%. In its last report to the market its CEO had been using phrases like ‘strong growth’ and ‘creative vision’ to describe its sales efforts in Asia. But that seems far from the case now. If sales were damaged significantly by the Hong Kong situation, ask yourself how much more severe is the impact of the coronavirus going to be?
Shopper numbers for Burberry in mainland China are down 80% as of its February 7 report to investors. We reckon it could be more. Burberry reported 64 of its 80 mainland stores were shut earlier this month with travel restrictions expected to also impact sales in its European stores.
BRBY price action for bears
Looking at the recent price action and BRBY shares seemed to really begin to run into trouble 17 February when they fell below the key £20 mark. After a brief drop, they rallied, with some heavy buying activity close to the end of day on 18 February. This gave the stock a bit of overnight momentum which would also have closed out some short trades.
We are not sure who was loading up on Burberry shares, but they obviously thought it looked cheap enough to buy at £19.35.
Once the price broke above £20 again, there was some further heavy selling. The price has stabilised today at around £18.80. Volumes have dropped again. It is Friday afternoon. It is half term.
But let’s not kid ourselves here. Burberry is heavily exposed to China. The coronavirus WILL have an impact on its bottom line. My argument is that the market has underestimated this. Burberry shares will be sold off further. The news cycle over the next three days will be a key factor in measuring how much farther the virus is spreading in Asia. If it gets a grip in Korea, the government there will be taking similar precautions to China and again we will see shopping centres deserted, if they are not already.
Further short term opportunities should emerge for Burberry shorters, but be aware that the price will rally occasionally as there are obviously some larger long term buyers who are scooping the stock up as it reaches lower levels.
