Burberry (LSE:BRBY), one of the most stable and predictable companies in the luxury segment, suffered a 20% plunge from its high recorded on 20 January 2020. I am going to find out why. I would also like to discuss the advantages and disadvantages of investing into this posh stock.
Weakening outlook for many industries
At the moment, many companies operating in China in the sectors of e-commerce, entertainment, real estate, but most importantly retail and leisure, predict a significant earnings decline due to the quarantine. Sadly, it affects many people in and beyond the Hubei province where the coronavirus was first discovered. They are unable to travel around, go out to eat, work or visit physical shopping outlets.
The latter has a considerable effect on fashion companies that see Chinese consumers as their main target market. Burberry seems to be one of the most obvious examples because 41% of its retail revenue comes from the Asia Pacific region with China accounting for a lion’s share of it. For comparison, Europe, the Middle East and Africa account for only 36% and the Americas for merely 23% of the corporate sales.
Recent earnings and management’s warning
It is not surprising that the statement issued by Burberry’s management on 7 February 2020 describes the effect on luxury sales as “material”. 24 of Burberry’s 64 stores in Mainland China are now closed, whereas remaining stores operate with reduced hours. At the same time, the remaining stores both in Mainland China and Hong Kong face significant customer traffic declines. However, I think that “this too shall pass”. Burberry will resume operations sooner or later, I believe.
Advantages and disadvantages of investing into Burberry
The company enjoys a renowned brand name and was founded in 1856. Its CEO, Marco Gobbetti, has vast experience of managing top luxurious brands having managed Céline, Givenchy and Moschino. Burberry aims to reduce its costs by £135 million between 2016 and 2021. It has a long history of paying dividends, with its current dividend yield amounting to 2.2%. The company also buys back its shares.
However, in addition to the company not being a dividend leader, its price-to-earnings (P/E) ratio is not as attractively low as that of companies operating in other sectors such as banking and natural resources. Its P/E ratio is just below 23. Moreover, the company has a high price-to-book ratio.
Nevertheless, Burberry’s earnings and revenues are quite stable. Its dividends have been increasing by almost 3% every year. However, even though the profits kept rising between 2016 and 2018, 2019 was rather disappointing and was marked by an earnings decline. The revenue was gradually declining between 2017 and 2019.
The outlook posted by the management last week can be described as stable, but it does not consider the potential effects of Brexit in my opinion.
What I would do
Even though Burberry might be an option for investors feeling enthusiastic about fashion companies, I would commit only a small amount of money at a lower price, thus waiting for the shares to decrease further.