Sector: Consumer, Apparel/Accessories Share price 10.11.2010: 1010.00p Fiscal year ends: 30.09

Sector: Consumer, Apparel/Accessories
Share price 10.11.2010: 1010.00p
Fiscal year ends: 30.09
Annual Report: 31.03
Recommendation: BUY
Company Profile:
Founded in 1856 originally based in the UK, Burberry has become a leading luxury brand dealing in
almost all areas of the luxury clothing sector, an approximately €150bn global market. with a rapidly
expanding global presence (currently 440 stores worldwide with 111 of them in emerging markets).
Although best known for there signature items the trench coat, Burberry scarves and the trademark check
pattern, Burberry has pushed expansion into new areas of the market such as children clothing and nonapparel goods in an effort to diversify there portfolio.
Burberry has 3 main channels of income, retail, selling the Burberry products from stores owned and
operated by Burberry, wholesale, the sale of goods to other prestige department stores, specialist retailers
and Burberry franchises, and Licensing, royalty income primarily received from Burberrys licenses in
Japan.
Burberry’s strategy is to create sustainable shareholder value, though accelerating retail led growth (21
mainline stores added during the year), and to stabilize there position in the high end retail sector by
Intensifying non-apparel development. They aim to balance market share and profit growth in the mature
markets (additional locations added in existing markets, including Paris and New York to intensify
Burberry's presence in these high potential metropolitan areas) as well as invest in under-penetrated market
to build their position (first Burberry stores in Bahrain and Lebanon in the year as well as 13 new stores in
China and Burberry's first flagship store in Asia).
This year Burberry brought out the control of its franchised stores in China from its franchise partner
Kwok Hang Holdings, allowing Burberry to take full control of the running of the stores in China, showing
that Burberry considers China as a fully matured market with potential for expansion In addition Burberry
has invested in a new joint venture in India was announced in November 2009, with a local partner
signifying Burberrys first real expansion into the Indian market.
Swot Analysis
Strengths:
•
Strong presence globally, not at risk of national market fluctuations.
•
Inventory down 36%
•
Dividend up 17%
•
diversification into children’s and non-apparel goods
•
strong focus on cost controls
•
CEO has been there since 2006 and is an influential man in the fashion industry
•
17% rise in revenue over the last 6 months
•
digital commerce in 27 countries
Weaknesses:
•
Increasing total liabilities (£536.10) but still relatively low
•
Luxury brand stigma?
Opportunities:
•
Strong investment in under-penetrated markets
•
Digital initiatives (1m plus Facebook fans and overall E-commerce sales up 60%)
•
Increased presence in urban centers of developed markets
•
increased profits from overseas thanks to weaker pound
•
marketing innovation, ‘retail theatre’
•
take over candidate?
Threats:
•
Spike in global cotton prices (at a 15 year high)
•
Piracy Issues, Fake Burberry becoming popular
•
Overvalued?
•
Over-extensive growth leaving Burberry vulnerable. Increased level of capital required with
multiple expansions across multiple markets, have to sustain start up losses in new regions, Brazil,
Mexico, India and Japanese non-apparel JV
Fundamentals:
EPS (adjusted) – 35.90p
increasing, shows that company is profitable and finds new ways to make money
EPS growth adjusted – 17.00%
indicated a reasonable amount of growth for investors
P/E – 19.9 Vs 27.3 (Mulberry) Vs 21.1 (LVHM)
shows current investor’s demand for shares
suggests an undervalued share with potential share price increase as the ratio has been increasing
Dividend cover – 2.56
indicates that company can easily afford dividends
Dividend yield – 2.0%
optimal level indicating stable flow of dividend
Dividend per share – 14.00p
increasing trend in dividends
paid out dividends event during recession
Revenue (£ m) - 1279.90
(annual increase of 7% on 2009)
Total Assets - 1139.60
Steady increase from 749.70 in 2007 indicating sustained growth of the company
Comparison with the market:
Since 2009 Burberry shares have consistently outperformed both the FTSE All-Share and FTSE 100 trends
indicating that, should this trend continue, this is a very profitable investment.
Although Burberry is currently underperforming when compared to Mulberry when this is shown against
Mulberry’s P/E ratio of 27.3 it supports the conclusion that Mulberry is currently overvalued and therefore
will readjust its share price. In addition Burberrys share price is far more stable supporting an idea of stable
growth rather than the more erratic growth shown by Mulberry.
Overvaluation
Share price of 1010p is though to be overvalued however it is dramatically below the book value of the
stock
Book Value = Assets-Liabilities / Shares Outstanding
590 / 435.36
1355p
Take Over Candidate
Throughout the last 2 years there have been many stories of potential takeovers of Burberry.
May 2008 - early rumors suggested a bid may have been forthcoming from Coach, the American handbag
maker.
July 2010 - Gucci-owner PPR was mooted as a potential predator
Sep 2010 - reported bid interest from an unnamed U.S. private equity firm.
Constant speculation about a possible take over of Burburry proves that Burberry is viewed by many
companies as a quality investment. However the rumors of bids have also dramatically pushed up
Burburry’s share price meaning that if talk of a bid dies off Burberry shares may lose a lot of value.
Why should we invest in Burberry shares?
Broad Consumer Appeal
– Across genders and generations
Global Reach
–Very strong foothold in relatively untapped Chinese Market
Diversified Business Model
– By product
– By region
Underpinned by Operational Efficiencies
–reduced inventory
Excellent Brand Momentum
Strong Financial Position
– Steady increase in revenue for the last 5 years