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Burberry (LSE: BRBY) stock has had a rough time, falling more than 70% in 18 months. The steep decline even saw the luxury fashion house downgraded from the blue-chip index to the mid-tier FTSE 250.
Fashion-wise, that’s like going from Milan to Matalan!
However, the stock was rising from the ashes today (14 November). As I write, Burberry is up 20% to 879p and is heading for its best intraday gain yet!
Mind you, the share price is still down 37% in 2024. But all big changes have to start somewhere. Is that what we are witnessing here? And if so, should I take some sharing?
Being positive
Over the past two years, Burberry has been hit by declining sales amid a global luxury recession and weak consumer spending in key growth markets in Asia, particularly China.
At the root of all this has been the problem of self-awareness. Burberry originally designed clothing to protect people from the harsh British weather, evident in his success with trench coats and scarves. But it tried to go upmarket with expensive leather goods and this backfired.
Today, new CEO Joshua Schulman (Burberry’s fourth boss in ten years) spoke about this at the company’s half-year results.
He said:Our recent underperformance is attributable to several factors, including inconsistent product usage and a lack of focus in our core outerwear segment…Today, we are urgently restructuring, stabilizing the business and positioning Burberry to return to sustainable, profitable growth...I am sure Burberry’s best days are ahead.”
Optimism about this turnaround plan is why stocks are up today.
Reality
The stock market is famously forward-looking, which is why the stock price can fall even after a stellar acquisition. It’s all about future expectations – next quarter, next half, or next year.
That’s a relief for Burberry today because the first half stunk. In the weeks to 28 September, revenue fell 22% year-on-year to less than £1.1bn. Sales in Asia Pacific were down 25%, and 21% in the Americas, while the rest of the region was down 13%.
As a result, the group posted an adjusted operating loss of £41m. That’s slightly better than analysts expected (£45m). However, Burberry made an operating profit of £223m profit at the same time last year, which tells its story.
Management is uncertain whether they will be profitable in FY 2025 (ending March). Much will depend on Christmas.
Should I buy Burberry stock?
It’s probably worthless to value the stock given the decline in sales and profits. We don’t know if things will get better quickly, slowly, or worse. Understandably, the dividend remains suspended.
Schulman is cutting costs, with £25m in savings this year, and annual savings of around £40m thereafter. Excess inventory will be reduced and there will be a global rollout of “scarf bars“, from New York, and the necessary re-evaluation of the product price.
Over time, he says the group could return to £3bn in annual revenue. But that will depend on Chinese consumers opening their wallets again, and we don’t know when that will happen.
As we have seen with Rolls-Roycereal change is based on improving financial foundations. I don’t see that with Burberry yet, so I won’t invest.
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