Quick Value #216 - Burberry Group PLC (BURBY)
Quick Value #216 - Burberry Group PLC (BURBY)
Luxury retailer, shares down 43% over 5yr period, trading at 9.8x EBIT
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Today’s post covers:
Luxury retailer with GBP4.3bn market cap
New CEO and creative team installed in 2022
Conservative net cash balance sheet
100%+ of FCF going to shareholder returns via buybacks & dividends
Shares are cheap at 9.8x FY24 EBIT guidance (~7-8x EBITDA depending on your IFRS 16 treatment)
Market Performance
Quick Value
Burberry Group PLC (BURBY)
[Note: 1 GBP = $1.25 USD… which means $15.13 share price = ~GBP12/share]
To set the stage, Burberry is massively underperforming other global luxury retailers with the stock down 43% vs. LVMH/Hermes up 110-260% over 5 years.
What they do…
Burberry is a luxury retailer of handbags, footwear, fashion apparel, trench coats, etc. based in London trading on the London Stock Exchange.
There are 413 global locations (down from 497 at FY14, -17%) with ~50% of those as standalone branded stores. Most of the store count decline came from “concessions” (department store / mall locations) — down from 227 locations FY14 to 138 at FY23, -40%.
There are 3 sales channels:
Retail — standalone stores, department stores/mall locations, outlets, and franchised locations.
Wholesale to other stores/resellers (~18% of sales)
Licensing (nominal amount of sales)
I haven’t reviewed other luxury retailers to understand whether concession stores and outlets are a big portion (or any portion) of their business. But a comment was made on the last earnings call asking about the “cheapening” of the brand through outlet/wholesale channels; something to monitor!
Why it’s interesting…
Luxury goods generally a resilient business
Burberry fundamentals better than share price indicates
Recent guidance cut; nearing trough?
1) Luxury goods resiliency
Luxury goods have grown at a 5% CAGR since 2000 with a minimal ~8% drawdown in 2008-2009. Increasing global wealth has been good for these retailers.
The post-COVID period (2022-2023) saw a delayed surge in industry sales. If you took that 5% CAGR and extrapolated from pre-COVID 2019 industry sales of $301bn, you’d get $365bn by 2023, about 6% lower than the industry result. Maybe a bit ahead of itself?
Margins at the higher end of retail are generally excellent… peers are cranking out 30-40%+ EBITDA margins while Burberry is in a respectable 20% territory (in-line with US companies like Tapestry and Capri).
2) Burberry fundamentals
The fundamental picture isn’t all that bad here, perhaps just not what you’d expect given the industry outperformance. Here are some charts with a variety of financial metrics:
Sales have grown at a 3% CAGR despite 84 stores closing
Margins are stable-to-higher
Net income growth in-line with operating income growth
Net debt roughly unchanged (ignoring the lease change rule) — very conservative balance sheet
Share count down (latest count is 356m)
Capital allocation going to shareholder returns at ~100% of FCF
If these are the results, then why are shares down / underperforming?
3) Recent guidance cut
Recent performance is weak and guidance was cut. Sales are expected to fall 4% on a same-store basis in the December quarter and operating profit for FY24 (ending 3/30/24) was lowered to 410-460m.
Those results put them back to 2020-2021 levels of operating profit (433m and 396m each).
Even at these lower levels, shares are really cheap… assuming a GBP12/share price and 356m shares outstanding = 4.3bn market cap. Call it zero net debt and you have a business trading at 9.8x EV/EBIT in a pretty good category.
Summing it up…
Brand turnarounds are difficult. Burberry brought in a new CEO in 2022 and hired a renowned creative officer. But those are overshadowed by some macro headwinds.
They’ve laid out a plan to hit 4bn revenue in the “medium term” from 3bn in 2023. At 18-20% margins = 720-800m operating profit. Again, I’m ignoring net debt/interest since they’ve run an essentially net cash balance sheet for years. Taxed at 22% and we have earnings of 562-624m; on 356m shares outstanding = EPS of 1.60-1.75.
If you believe that financial model is achievable, then this stock is really cheap… taking a stance on that likely involves taking an opinion on their brand, turnaround effort, etc.
Anyone looked at this name or have deeper insights?