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Stock price: 573p ($943.82)

Conclusion: Despite a negative geographic mix, Burberry is resisting quite well. We expect a return to low double digit growth in EPS in F11. Burberry trades at 17.2x cal P/E, based on 2010 estimates, in line with the sector. Our DCF suggests some upside, but we see more interesting opportunities elsewhere, notably PPR.

H1 results: Sales up 6% reported to £572m, down 5% like for like. EBIT down 12%, down 19% underlying. EPS down 11% to 13.6p

A business mix exposed to the crisis.

Geographically, Burberry remains heavily exposed to developed markets, which represent 90% of its sales. In addition, Spain was still accounting for 9% of the total revenue, despite collapsing sales in H1 (-37%). Asia Pacific excluding Japan is taking off (less than 15% of the total). Burberry is struggling in the US, but outperforming peers in department stores.

From a distribution channel standpoint, although Burberry is switching to retail, less cyclical, wholesale was still making 38% of group sales in H1.

Forex is helping bottom line in licencing, given the absence of operating expenses. Its impact on wholesale and retail is positive on top line, but more than offset by higher reported operating expenses. Forex impact should decrease next year, with still some benefits expect from a stronger yen.

Burberry can rely on a solid balance sheet with a net cash position of £56m (end of Sept) vs £114m net debt last year. the improvement results primarily from lower inventories, down 40% at constant exchange rates.

High single digit growth platform for the medium term

Management is looking for sustained retail expansion (424 DOS end of September), driven by the addition of 10% more space per annum (+8-10% forecast for F10). Wholesale could double in Americas to £80m, while the network in China could reach 100 franchised stores.

Management is also projecting strong growth for non apparel, only a third of the business, and childrens' wear (5%). All in all, we expect Burberry to offer a medium term platform of high single digit growth in sales, driven by double digit growth in retail and mid single digit growth in wholesale. We expect the revenues from licencing in Japan (ending in 2015) to remain fairly stable in the coming years.

Upside potential on the margin front.
We expect margin to reach 15% this year, helped by the profits generated from licencing. Adjusted from licencing, Burberry’s margin achieved only 10% last year, as Burberry’s expansion into retail leads to increased operating expenses. We expect a return to positive leverage next year, but it should be gradual as management keeps opening new stores at a rapid pace. We project a 50bp gain between fiscal 2011 and 2013, which could lead to mid teens growth in EPS.

Burberry trades at 17.2x P/E based on cal 2010 estimates, in line with peers. Our DCF suggests sligtly less than 10% upside based on our fairly optimistic assumptions (€624). Our valuation range (€570-€624) indicates that the stock looks reasonably priced, even based on long term assumptions.

The upside risk might come from its unique British positioning, which makes it an attractive take-over target.

Disclosure: none

Source: Burberry: Resisting Quite Well Despite Negative Geographic Mix