It’s been a tough few months for fashion retailers, as the mild weather hit sales of winter woollies and coats, but could spring herald an exciting new season?
Luxury Gap
Luxury British fashion house Burberry Group (LSE: BRBY) was an exciting play targeting the brand-hungry Chinese consumer but is that trend played out for now? It has certainly looked that way. A crackdown on corruption and gift-giving has been partly to blame, as has sliding consumer confidence as China flirts with a hard landing. Burberry’s share price is down a distinctly uncool 35% over the past year, but all is not lost.
Its third-quarter trading update revealed a welcome return to growth in mainland China, if overshadowed by troubles in Hong Kong (where sales fell 20%) and Macau. Revenues are rising again, just. They were up 1% to £603m in Q3 against a 4% decline in Q2, helped by strong performance in Germany, Italy, Spain and Japan. Its digital drive continues to pay off and mobile now drives the majority of traffic to Burberry.com.
The future looks sticky, however, with the company warning of an uncertain outlook for luxury demand in 2017 and underlying cost pressures. But Burberry boasts a strong balance sheet and robust 20% operating margins. With its valuation dipping below 15 times earnings, now could be a good time to buy, even though China still casts a shadow.
Half Marks
It’s a long time since Marks & Spencer Group (LSE: MKS) was a fashion leader. Its Christmas trading statement told the same old story of a booming foods business and ailing sales of general merchandise (GM), mostly clothing. Like-for-like GM sales fell 5.8% and it was easy enough for management to blame that on the weather, but don’t be fooled.
Yes, M&S kept its cool as rivals were panicked into a price-cutting frenzy, and this helped it post a significant rise in gross margins. Yes, M&S.com is performing strongly, with sales up 20.9% driven by strong customer traffic. Yes, the food is fab. But I lost faith in Marks’ fashion sense years ago and it has done nothing to prove me wrong: last time I visited its Covent Garden store the food hall was bleeding edge 21st-century while the clothing department layout was lost in the 1970s. Are fashion customers being served? Absolutely not.
NEXT step
If you bought NEXT (LSE: NXT) five years ago you’ll be feeling pretty good today as the share price is up 235%. But it has slipped lately, plunging nearly 15% in the past six months, and mild weather was only partly to blame. NEXT went into winter with reduced stock availability, due to operational difficulties in its Directory division. While frustrating, that sounds like a temporary problem rather than something more serious. But I was concerned by comments that rivals are catching up with its popular NEXT Directory credit book.
With operating margins of 20.3%, it still has a firm grip on its business. Double-digit earnings per share growth is slowing to mid-single digits, so maybe the glory days are over. At 16 times earnings, you’re paying a luxury valuation and getting a cut-price 2.2% yield. NEXT’s strong cash flow and colder January weather may help the next set of figures, and it certainly promises more fashion fun than BRBY or MKS. But this is a tough sector right now.