Is there such a thing as a fashionable investment? Well, if you decide to invest in a luxury fashion brand there just might be.
Burberry (LSE:BRBY) is a high-end fashion stalwart and home of the iconic check that is a big seller for the brand. Established by Thomas Burberry in 1856, this usually buoyant company, has been hurt by the current coronavirus in outbreak in China.
Coronavirus effect
On February 7, it released an update based on the impact of the coronavirus on its operations, which has been significant. To provide context, approximately 40% of its retail revenue comes from the Asia Pacific market.
CEO Marco Gobbetti said at the time: “The outbreak of the coronavirus in Mainland China is having a material negative effect on luxury demand. While we cannot currently predict how long this situation will last, we remain confident in our strategy.”
Some 24 of the firm’s 64 stores in China were closed at the time of the statement, and its remaining stores were operating with reduced hours, which had led to a significant decline in footfall.
Burberry added that the spending patterns of Chinese customers in Europe and other tourist destinations have so far been less impacted, but given widening travel restrictions, it anticipated spending to “worsen over the coming weeks”. It has not updated its guidance for the current year, which ends on 31 March.
Crunching the numbers
The past month has seen a slump of 12% in the share price, but reviewing the general performance, it seems to be strong. It has seen an increase in profit and dividend share year-on-year in the last three years. These are signs of a company doing well and being stable, which always bodes well from an investment perspective.
The current P/E ratio stands at an expensive almost-23, however it has a slightly high price-to-book ratio, which is positive.
Despite a somewhat turbulent present backdrop, one factor to take into account when judging its ability to bounce back (which I believe it will), is that of its leadership. CEO Marco Gobbetti has a long history in luxury and I believe is a good person to guide the good ship Burberry through current turbulent waters.
What I would do now
I believe Burberry will recover, although short-term pain is to be expected due to the coronavirus.
Its general performance over the last few years has been dependable enough to know that once the issues in China do subside, operations can return to ‘normal’ (normal being good, if not spectacular, growth).
I would not be willing to invest a huge sum of money in the firm at this moment in time though, but the falling share price does represent an opportunity to pick up the shares more cheaply than they’ve traded at in almost a year. If they fall further, I might be tempted.