Burberry (BURBY) Stock: No Growth Opportunities

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Burberry clothes store

tupungato/iStock Editorial via Getty Images

Investment Thesis

Burberry (OTCPK:BURBY) is far weaker than it was even 4 years ago and continues to show disappointing revenue growth numbers. Although the bottom line numbers such as free cash flow were slightly better, they were still far from previous years. Burberry currently has a P/E value of around 19.5 which is below other retailers like LVMH, but this valuation fits the growth story of Burberry. Even though this quarter showed an improvement in regions like the Americas and Mainland China, they were way down in other regions like Europe and Japan. Lastly, the luxury market does not seem to have any catalysts as of late and that can cause some more growth hurdles for Burberry long term. I would invest in Burberry at $19 where the dividend yield would be around 3% and the P/E ratio would be at 15.

Younger People and the American Market

According to the Burberry Annual Report 2020/2021,

Millennials and Gen Z show a higher level of resilience, continuing to make luxury purchases economic uncertainty. Customers from older generations are more cautious and considered with their spending.

To paraphrase E. Hamilton Lee, there are old pilots and there are bold pilots but there are no old bold pilots. While Burberry highlighted this behavior of younger consumers as a positive as it benefits the business today, long term, I believe this could cause more turbulence. If younger people are getting into more credit card debt and buy now pay later services for goods as fickle as luxury, it means consumers are weaker overall. Eventually, this will come back to bite Burberry as it did during the pandemic recession. Luxury spending has still not fully recovered. During the pandemic, Burberry is lucky that due to the government intervention either with the stimulus or with the Federal Reserve buying bonds in the US, the economy was able to bounce back incredibly fast. In fact, for Burberry, revenue growth would have been a lot worse off if it wasn’t for the American market delivering 100% full-price growth in the first quarter and 80% in the second quarter according to the fiscal year 2022 earnings call . Gen-Z only makes up 4% of the luxury market right now and millennials make up 32%, however, this is expected to increase to 8% and 50% respectively by 2025. Currently, luxury markets depend the most on Gen-X and baby boomers who have become more into savings than spending.

Economic Forecast

Consumer sentiment is at its lowest point in a year at 67.4. Real disposable personal income is also at one of its lowest points in a year at 15,373 as of November 2021. Since the American market was one of the biggest reasons why Burberry didn’t end in a larger loss, this is worrying news for Burberry. The EMEA region fell by 31% in the first half, due to lack of tourism generating revenue.

Real disposable personal income

Fundamentals

Burberry has not posted positive revenue growth in the last 5 years, so this has been an ongoing problem even before the pandemic. Annual YoY revenue growth is down nearly 11%. The bright spot for Burberry is their Return on Invested Capital and Return on Equity being at 25% and 33%, respectively. Free cash flow is also up 16% from 2019 but still down 28% from 2018. Overall, Burberry is in a weaker place than it was 3 years ago and they are losing ground to other luxury retailers like Louis Vuitton (OTCPK:LVMHF) ( OTCPK:LVMUY).

Asian Markets

Even though the Chinese market for full-price was up 40%, this could be ending soon. News has come to light of Chinese public servants receiving pay cuts of over 20% and even more astounding was the fact that civil servants can get paid around 200,000 yuan, according to Nikkei Asia. These are the luxury consumers that buy Burberry, so if they are taking a hit, it’s going to be a lot harder for Burberry in China. Japan sales were already down and the remaining Asia-Pacific growth driver in South Korea is not immune to the effects of a weaker Chinese consumer.

Dividend

Burberry is also implementing a £150 million share buyback program by the second half of 2022. If the full amount is used, that means the share float will drop by nearly 2%, a massive reduction in a short amount of time. Additionally, they are spending nearly the same amount on share buybacks as they would on dividends with a dividend yield of about 2.3%. This dividend yield is higher than the S&P 500 average dividend yield of 2% but not by much, and this stock has a lot of risk at the moment.

Technical Indicators

The 50-day SMA is far below the 200-day SMA leading to a bearish conclusion and the RSI of 55 indicates moderately bought levels. While the stock may increase slightly due to buybacks and the RSI value, it is likely that the stock will reach its previous peak for a long while. The stock price is reflecting all this as the stock has dropped over the last year. Looking at the Burberry price chart, the stock has had quite a dramatic fall from over $32 to now $24.56. The chart begins with a steep decline and then a small run-up back to $27 and then back down again to $22. The stock price has risen slightly since then to $24, however, based on the previous run of the stock, this looks to be a false move up. Despite operating profit being up 176%, it is mainly due to last year’s operating profit being hampered down by £244 million pounds worth of charges last year.

Burberry chart
Data by YCharts

Conclusion

Burberry has not delivered the growth needed in today’s luxury market, and while the valuation is not sky-high, I believe the price is coming down even further. I think at $19, Burberry would be worth the price and it would come with a pretty good dividend yield. However, at the moment, Burberry does not have the growth opportunities nor the current growth to even justify the current price point.

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