Burberry Growth In Check

Published in Company Comment on 17 January 2012

Sales surge but the future looks more challenging.

Luxury fashion house Burberry (LSE: BRBY) has been one of the great British retail success stories of recent years, and the group, famed for its iconic black, tan and red check pattern, reported another quarter of strong performance in a trading update this morning

Great growth

Revenue for the three months ended 31 December came in at £574m, up 21% (at constant exchange rates), and slightly ahead of analysts' forecasts.

Chief executive Angela Ahrendts, who has steered a clever course between mass market and exclusivity since taking the helm in 2006, reported growth across all channels of the business:

  • Retail (73% of group revenue) was up 23% -- comparable store sales grew by 13%, with the balance from new space -- led by flagship markets, including London, Paris, Beijing and Hong Kong.
  • Wholesale (23% of group revenue) was up 15% on improved supply chain performance.
  • Licensing (5% of group revenue) was up 12%, driven by the success of the Burberry Body fragrance launch.

Geographically, growth was led by the Asia-Pacific region, where underlying sales leapt 36%, while high-spending tourists helped growth in the shakier economies of Europe and the US.

What's in store?

While Burberry's third-quarter results were strong, there were some notes of caution in the update, pointing to a slowdown in growth.

Ms Ahrendts said the group would be "staying mindful of the challenging macro environment" and referred to achieving "long-term sustainable growth". The latter can be taken as director-speak for more moderate growth than that recently seen.

Growth of 13-14% in retail selling space is now expected for the second half, which is slightly down from the 15% the company forecasted in its interim results in November.

Meanwhile, wholesale revenue is expected to increase by a mid single-digit percentage in the second half; the same applies for licensing revenue for the full year.

Burberry's shares rose tenfold between November 2008 and July 2011. Currently trading at a little under £13, the shares are around halfway between their peak of £16 before the summer market meltdown and their October low of near £10.

Based on last night's analyst consensus forecasts, Burberry is on a current-year price-to-earnings (P/E) ratio of 21.

When I wrote about the company almost two years ago, I suggested that "any disappointment is likely to hit the share price hard. And in the fickle world of fashion, it's all too easy to make a humiliating faux pas".

I still feel the same way about Burberry, especially with indications that growth may be moderating. However, given the company was also on a P/E of 21 when I wrote about it previously -- and a share price a mere £7! -- who am I to talk about humiliating faux pas?

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