Burberry shares LON:BRBY once provided The Armchair Trader with a phenomenal shorting opportunity in the early stages of the pandemic, as we realised how the shutdown would impact its important retail sales in Asia.
It seems that Burberry stock is continuing to reward short sellers this week, due to a profits warning and suspension of its dividend.
What went wrong at Burberry?
Talking to fashion industry insiders, it seems as if Burberry has been suffering from delusions of grandeur. The focus of previous CEO Jonathan Akeroyd, who fell on his sword on Monday after the profit warning hit the market, was to take the company upmarket into the more ultra-expensive arena. This does not seem to have worked.
Burberry is being hit hard by a downturn in sales in both the American and Chinese markets. This is a double whammy that has driven Asia Pacific sales down 23% over the quarter compared with a year earlier, with another 23% shaved off US sales. Overall the company has announced a staggering 40% drop in full year profits.
It seems as if the Akeroyd playbook has been a disaster for the company and shareholders, so it was no surprise to see him departing this week.
What will Burberry do next?
My impression of the relative health of the global luxury goods sector is not as doom-laden as Burberry’s. The company has moved quickly to fill Akeroyd’s shoes, naming Jimmy Choo veteran Joshua Schulman, who is well respected in fashion industry circles.
The company has also suspended its cash dividend to investors and says that it is exploring potentially hundreds of redundancies. It will take time for Schulman to make his presence felt at Burberry, and in the meantime the company has also said it is facing currency headwinds.
“Burberry’s revenues were down c4% in its most recent year, to just under £3bn,” observed the managers of the Finsbury Growth & Income Trust [LON:FGT], who still hold the shares. “Revenues are likely to fall further in the current one, as difficult trading conditions persist.”
“We note that at today’s market capitalisation of £3.6bn, Burberry is valued on c1.25x historic revenues. This seems low for a business that has generated operating margins of over 16%pa on average for the last decade and will definitely be too low if the current, relatively newly installed, CEO, CFO and Head of Design can restore excitement to the brand and grow revenues again.”
Can Burberry shares rally?
Burberry shares are down over 46% YTD and off 64% in the last year. This is an appalling drop in value for a company of this size and pedigree and with a brand of this magnitude. At some point Burberry shares will reach a turning point under Schulman where the stock can rally consistently. There still seems to be a lot of ‘buy and hope’ activity from investors trying to time this turnaround, yet this buying activity only seems to create short-term blips.
For the short trader, there may still be some opportunities to make some cash out of Burberry over the rest of the summer as there are likely to be further bad numbers coming out of the company over the near term. Schulman will want to start making his presence felt as quickly as possible, however, and top spin on the Burberry story could create some short rallies.
Asia Pacific fashion game is changing
There is a lot of pessimism currently inside the fashion sector, with some other names also encountering problems with sales, especially in China, which is an enormous market for the big brands.
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This trend likely reflects the reality of spending habits on the street in China where people have less money in real terms than they used to, despite the positive economic numbers still being pumped out by the ministries Beijing. Chinese buyers are getting more choosy and there is increasing competition from regional designers, especially from Korean brands like Basic House and E-Land.
E-Land has reported annual growth rates in excess of 30% in China while Basic House has admitted that it is shifting much more product in China than it does in its Korean domestic market. It is notable that neither firm is going after the ultra-wealthy category in Asia that Burberry was fishing for.
Burberry continues to look like an underperformer within the sector for at least another six months and worthy therefore of the attention of short sellers. I anticipate China will remain a tougher market for it to compete in going forward. Schulman will have his work cut out for him.
