Burberry Group PLC (LSE: BRBY)

Burberry Group PLC (LSE: BRBY) is an FTSE 250 listed global retailer, manufacturer, and wholesaler based in the United Kingdom. The company's operations are segmented into Licensing and Retail/Wholesale. BRBY licenses third parties for the manufacturing and distribution of products using Burberry trademarks. This report covers the key recommendation rationale and conclusion for the stock.

Key Recommendation Rationale – Sell at GBX 1,238.50

• Resistance near Current levels: BRBY’s stock price has breached the Resistance (R2) which was stated in the previous report on 19 July 2024 therefore, there can be a possibility of a decline from resistance levels.
• Declining Financial Performance and Losses: Burberry's financial performance has taken a significant hit, with a reported 22% decrease in revenue year-over-year (YoY) for the first half of FY25. This decline is primarily driven by a 20% drop in comparable store sales, with all regions, including Asia Pacific, EMEIA, and the Americas, showing negative trends. The company also reported an adjusted operating loss of £41 million, compared to a profit of £223 million during the same period in the previous year. The sharp drop in profitability, coupled with a free cash outflow of £184 million, highlights the challenges Burberry faces in returning to sustainable growth.
• Inventory and Product Strategy Issues: Despite efforts to reposition the brand, Burberry is still struggling with an inventory overhang, which has led to significant charges for inventory provisions. The company's strategy to rebalance its product offer and reduce reliance on seasonal fashion is still in its early stages, and the pricing of products, particularly in the leather goods category, has not aligned well with its category authority. The underperformance in categories like leather goods and shoes further exacerbates the company's difficulty in executing its strategic vision and generating consistent demand across product lines.

Valuation Methodology: Price/ Earnings Value Approach

Share Price Chart  

Conclusion

BRBY is expected to trade at a premium considering promising Q3 FY25 trading update, ongoing innovation, operational expansions, and future strategic initiatives. For conducting the valuation, the following peers have been considered: Watches of Switzerland Group PLC (LSE: WOSG), Dr Martens PLC (LSE: DOCS) and others.

Given its current trading levels, the recent rally in the share price, relative valuation, and risks associated, it is prudent to exit the stock at the current levels. Hence, a ‘Sell’ recommendation is given on the stock at the current market price of GBX 1,238.50, as of 24 January 2025 at 09:05 AM GMT.

Note 1: Past performance is not a reliable indicator of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance level is 24 January 2025. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and/or technical analysis taking into consideration both short-term and long-term scenario.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.