Description:
Burberry is a global luxury brand with a distinctively British style. Its products, including outerwear and large leather goods, are recognized worldwide. Burberry controls its entire value chain, from design and sourcing of apparel and accessories, to the sale in its own stores or through established licenses and franchises. At present, its products are sold in about 500 outlets, and recently the company added its own e-commerce service.
Burberry is expected to invest about £180 million in capex (approx. 9% of its 2013 sales) to support growth in Asia and in the high-end travel destinations in its mature markets. Furthermore, the company intends to grow organically through structural measures such as: better control of its distribution network, product improvements and increasing product variety (for instance by adding watches, shoes and men’s accessories). The expansion potential for Burberry is excellent and such moves can be financed internally through its strong balance sheet.
Over the last 5 years operating results have been excellent; however the recent weakness in the share price, made the company a take-over target.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- Burberry operates at a lease-adjusted EV/EBITA ratio of 8.9 – the sector average is 11.1
- The historic P/E level of 25x was recently de-rated to 15x, and this, despite the fundamentals remaining unchanged,
- Historically, sales in its own shops represented less than 50% of revenue; today however, this figure has increased to above 70%,
- The new management team has set ambitious targets to further improve operating ratios,
- Burberry is a take-over target.
Weaknesses:
- Burberry has the means to finance its expansion strategy through its balance sheet; however, as in the case of Bulgari, its financial limits could be reached relatively quickly,
- The luxury segment, and in particular Asian sales, could decline much quicker than expected from its present top,
- The management team is lacking a long term view for the brand name and has not explored all available opportunities for its expansion strategy.
- In the crowded top-end market segment, an expansion in sales volumes and profit margins are difficult to implement,
- Burberry is unable to connect its products with younger and trendier clients.
Key term: – TOT