FTSE 100 fashion house Burberry (LSE:BRBY) has been around for 165 years. It has a loyal following and appeals to new customers too. The pandemic has thrown it a curveball though, and it’s been dealing with store closures, travel restrictions, reduced revenues, job cuts and a multitude of unforeseen issues. So how does its investment case look now that the vaccine rollout is underway?
Beating the FTSE 100 to recovery
When the pandemic hit, it decimated its revenues because two key areas of sales are airports and Asia. Both of these were immediately closed. However, China is showing strong signs of recovery and international travel is tentatively resuming. The Burberry share price has been rising in response too.
Like most public companies, Burberry’s also focusing on sustainability, addressing climate change and embracing the shift to a digital future. But it earned brownie points in the eyes of the ESG funds when it offered a factory to make PPE for the NHS.
All these incremental issues influence the Burberry share price. But as a long-term investor, I have to step back and look at the bigger picture. And I find what I see reassuring. If I owned shares in Burberry, I wouldn’t worry, because overall I think the company will still stand far into the future.
Burberry has a market cap of £7.6bn, earnings per share are 29p, and its price-to-earnings ratio (P/E) is a very high 63. It’s a FTSE 100 firm with quality, strength, and global reach all going for it. The Burberry share price is up 3% in a year, but it’s still down 18% from its pre-pandemic high. In comparison, the FTSE 100 index remains down 5% in a year.
A minor victory in China
High fashion has long been at the behest of counterfeiters, and when it comes to fakes, no place reigns supreme like China. This makes it difficult for luxury brands to fight for fair market share. However, this week Burberry won a small victory when granted a preliminary injunction against the owner of the Chinese copycat chain Baneberry. What makes this significant is that the trial is still underway, so it sends the message that China wants to improve its reputation for quality.
This can only be good news for Burberry as it looks to expand its reach in Asia. Demand for luxury fashion from Chinese consumers is growing. And Asian economies appear to be emerging from the Covid-19 pandemic to a rapid recovery. I think this presents a good investment case for Burberry.
Burberry appears to be in touch with younger generations. And it’s on the ball with social media marketing. In its Q3 results, mainland China saw strong double-digit growth, while overall comparable store sales fell 9%.
Analyst consensus seems to be that Burberry is a stock worth holding. If I owned shares in this FTSE 100 star, I’d be hanging in there.
However, I think it’s expensive, its high P/E reflects a high level of optimism, when caution should be paramount. The fashion sector is notoriously fickle, and what’s working now may not in a few months’ time. A rapid rise in inflation would be bad for Burberry, as consumers will have less cash for luxuries. Plus, a slow return to global tourism could shatter sales growth forecasts.
With so many unknowns, I’m not tempted to buy shares in Burberry today.