Should I Buy Burberry?

Published in Company Comment on 13 September 2012

Harvey Jones measures up Burberry (LSE: BRBY).

It's time to go shopping for shares again, but where to start? Insurance titan Aviva (LSE: AV), which looks ripe for a re-rating? Dividend behemoth Vodafone (LSE: VOD)? Or mining giant Rio Tinto (LSE: RIO)?

There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So here's the question I'm asking right now. Should I buy fashion giant Burberry (LSE: BRBY)?

From chavs to China

I checked out Burberry's measurements a couple of months ago, when I spotted that the luxury goods sector was feeling the squeeze, and concluded that its share price looks a bit baggy.

With the rich beginning to feel the pinch, like the rest of us, I suspected Burberry's share price would soon shrink to fit. And this week, my fashion sense was proved correct.

On Tuesday, a distinctly uncool £1.3 billion was wiped off the company's share price, after it warned sales growth had tumbled faster than a catwalk model in outsized heels.

This wasn't a check-ered performance, it was a fashion disaster. A couple of years ago, Britain's much-maligned chavs were unfairly blamed for besmirching the brand by smothering themselves in Burberry. This time, it's the Chinese.

That's not cool!

The 156-year-old fashion house has enjoyed a storming decade after floating in 2002, as Chinese and other emerging consumers lavished themselves with Western luxury.

Burberry has lined up two store openings in Hong Kong and Shanghai for later this year, to tap into the trend. But suddenly, the Chinese have stopped spending.

Some say they are worried about the much-anticipated hard landing. Others put it down to the fraught political succession, as outgoing President Hu Jintao battles to secure a smooth handover. This has made life a bit tricky for Chinese political 'gift buyers', because -- so I've heard -- they don't know which politician to 'persuade' with a designer cashmere scarf or trenchcoat.

Burberry generates 20% of its revenue in emerging markets, up from 6% just four years ago. But with Western consumers also feeling the squeeze, its slowing sales are a global trend.

Director dealings

If you're a dedicated follower of investment fashion, you might want to know who else is buying Burberry. The luxury goods retailer may be out of fashion, but that hasn't deterred its directors. Quite the reverse.

They have been buying Burberry shares as if they're going out of style, splashing out more than £1 million in recent days. Chief executive Angela Ahrendts has spent more than £540,000 alone.

So should I part with a more modest sum?

Shrink to fit

We'll find out more about Burberry's prospects on 11 October, when it delivers its next trading update. But finance director Stacey Cartwright has admitted the signs aren't good, because fewer people are visiting the company's stores.

I'm not that much into fashion right now, but I always like to keep my eye on trends. These are tough times for fashionistas, so I'm not buying Burberry today, but nor am I writing off this great British brand.

At time of writing, its shares trade at £10.61. That's a mighty 33% drop from its 52-week high of £15.86. If it plunges a little lower, Burberry could prove a perfect fit.

Yield to the yield

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> Harvey Jones holds Vodafone and Aviva. He doesn't own any other shares mentioned in this article. The Motley Fool has recommended shares in Burberry.

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