Stock Price: 565p
Conclusion: Trading update leads us to upgrade our F10 estimate by 5.6%. Burberry (OTCPK:BBRYF) stock price stands slightly above our revised valuation range of p540-550.
H1 Trading update: Sales up 6% reported, down 5% underlying in H1. Guidance: selling space up 8-10% in retail, wholesale to decline by 15% in H2, licencing down 5-10% for the full year.
Trading update provides good news
-Comparable store sales were up 5% in Q2, vs 0% in Q1. Although it is too early to extrapolate, we are now looking for 2% increase for the full year. In addition sales will be boosted by +8-10% selling space.
-Wholesale was down 21% in Q2 vs 28% in Q1. Management forecasts -15% in H2. Burberry keeps gaining share in the US, where wholesale shows some improvement in H2, despite further adjustment in inventory levels.
-licencing revenues should decline by 5-10% against 10-15% previously forecasted, thanks to the amendment of the Japanese apparel licence.
-Gross margin should deteriorate in H1 as a result of the clearance activity, but not as much as expected.
-H1 led to a cash inflow, which reflects a tight control over inventories.
Last forex impact should remain positive for the full year (7-8%) thanks to the recent weakness of the sterling.
Burberry shares trade at 18.8x P/E (2009) and 17.2x P/E (2010 est) respectively. We think that they are already predicting a return to double digit growth in profit next year, leaving little room for further rerating in the coming months.
