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Stock Price: 421p, (BBRYF.PK) $6.90USD
Conclusion: Stock fairly priced based on our fair value range 430-450p

Q1 sales down 4% underlying, up 8% on a reported basis.

Burberry numbers in the first quarter are in line with our forecast for the year of a 4% decline in underlying growth. Reported sales should remain flat versus 8% in Q1, based on the recent strength of the sterling and weaker sales in Japan.
Burberry once again outperformed peers in Q1: 4% decline looks remarkable for a group specialised in apparels (70% of sales) and exposed to Spain and Japan.

Retail is mainly responsible for these relatively good numbers. First, Burberry managed to maintain comparable store sales flat in Q1, despite tough trading in the US and in Spain, owing to the success of the Spring / Summer ranges in Europe and in Asia. Our forecast for the year is based on a conservative 2% decline which might be too pessimistic. Second, management keeps adding new space, new stores generated 8% growth in Q1 and Burberry plans to increase selling space by 10-12% this year. Retail sales could increase by 11% on a reported basis versus 28% in Q1.

Management does not see any turnaround in wholesale and licencing, down respectively 28% and 3% in Q1. Wholesale channel remains depressed, notably in the US, where customers adjust their inventory levels in line with current sales (around 15% decline). In addition, the closure of Thomas Burberry and the rationalisation of small accounts should negatively impact wholesale revenues by 10% in H1. For the year, we forecast sales to fall by 18% underlying and 14% on a reported basis. As to licencing, sales should go down in line with the 15% trend observed for Japanese department stores, partly offset by a stronger yen.

On the bottom line front, management confirmed that gross margin should deteriorate in H1 and improve in the second half of the year, while operating expenses should increase due to the extension of the retail network, operating deleverage, partly compensated by £35m ($57.5m USD)of benefits from the cost efficiency programme. We expect margin to be slightly down versus last year (15% ebit margin) and EPS to fall by 5-6% to 28.4p.

Burberry trades at 14.6x 2009e and 13.9×2010e, close to peers' average. We feel that Burberry is fairly priced, based on a valuation range of 430-450p. We have no reason to upgrade our numbers as long as traffic and sales keep falling down in key markets such as the US, Spain or Japan. In addition, the forex impact will be less favourable than initially anticipated.

Disclosure: No positions

Source: Burberry: Fairly Priced, No Reason to Upgrade at This Time