Is This the Season's Must-Have Stock?

07/19/2013 9:00 am EST


Harvey Jones of The Motley Fool UK asks whether luxury goods purveyor Burberry Group plc is the perfect accessory for your portfolio.

I'm shopping for shares right now, should I pop FTSE fashion fave Burberry (BRBY) into my man bag?

Fun with Fashion

I've been an admirer of swanky fashionista Burberry for some time, and tipped the stock to outperform when I reviewed it in September last year. At the time it traded at ?10.61. Today, it would cost you ?15.28, a rise of 44%. During the same period, the FTSE 100 grew just 13%.

Burberry has been turning on the style for some time. It is up 280% in the last five years, against 28% for the index. Last week's first-quarter update showed an 18% rise in underlying revenue to ?339m, thanks to a standout spring/summer 2013 season. Comparable store sales contributed 13% of that figure, with the balance coming from new stores, as Burberry opened two flagship stores in Shanghai. But it wasn't all cool on the catwalk. Despite that pleasing retail performance, profits before tax fell, while chief executive Angela Ahrendts warned that "the macro outlook remains uncertain".

Chinese Arithmetic

In May, I called Burberry this season's must-have stock, and I'm glad to see it continuing to make progress. Its success is mostly down to Chinese demand, which could leave it vulnerable to a China slowdown. I'm not too worried. If the Chinese authorities manage the shift from an export-led to a consumer economy, British exporters like Burberry could do even better. Latest data showing Chinese GDP growing at a respectable 7.5% a year should also soothe concerns.

Burberry isn't doing that badly in the developed world, with high single-digit growth in European comparable store sales, and double digit growth in the Americas. The company is well diversified, as its success in Latin America underlines. Burberry has also integrated online sales into its regional infrastructure, and global sales are growing strongly.

The Luxury Gap

A recession usually spells disaster for luxury goods companies, but this time it's different, as the world's wealthy consumers have sailed on unscathed. Even if emerging markets do continue to slow, this is more likely to hurt those at the bottom, who don't buy Burberry, than those at the top, who do.

My big concern is that Burberry will struggle to repeat its recent storming share price performance, especially since it now trades at a pricey 21 times earnings, against 13 times for the FTSE 100 as a whole. It yields just 1.9%, covered a generous 2.5 times, well below the index average of 3.5%. Forecast earnings per share growth remains positive at 11% to March 2014 and 13% to 2015, by which time the yield should have crept up to 2.4%. Burberry is a strong hold, but like its menswear, a little too pricey for my liking.

Harvey doesn't own shares in any company mentioned in this article. The Motley Fool has recommended shares in Burberry.

Read more from The Motley Fool UK here...

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STOCKS