Inventory Woes And Luxury Market Challenges Threaten Margins But Focus On Outerwear And Cost Cuts Could Revive Growth

Key Takeaways

• Focus on heritage and core categories may not capture market share, impacting short-term revenue growth amid cautious investor sentiment.
  
• Heavy inventory provisions and cash preservation for growth investments could pressure margins, affecting profitability and shareholder returns perceptions.
  
• Burberry's focus on core strengths, cost efficiency, strategic market presence, and enhanced retail experiences aims to boost revenue, brand loyalty, and global market stability.

Catalysts

Manufactures, retails, and wholesales luxury goods under the Burberry brand.

• Burberry's pivot back to its heritage and focus on outerwear may not yield immediate results, potentially impacting short-term revenue growth. Investors are cautious whether emphasizing core categories will capture enough market share.
  
• The company's heavy inventory provisions and a planned one-time inventory reduction could pressure gross margins in the near term, delaying profitability improvements.
  
• Uncertainties around the macro environment and a challenged luxury market, particularly in China, may weaken consumer demand and hurt Burberry's revenue projections.
  
• With the suspension of the FY '25 dividend to preserve cash for growth investments, there might be concerns over cash flow and overall shareholder returns, affecting earnings per share perception.
  
• While cost-saving measures are underway, they focus on head office streamlining and broader evaluations, which might not sufficiently offset inflationary pressures or previously reduced cost bases, possibly compressing net margins in the short term.

Burberry Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Burberry Group's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 10.0% in 3 years time.
• Analysts expect earnings to reach £270.0 million (and earnings per share of £0.74) by about December 2027, up from £38.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £87.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2027 earnings, down from 89.9x today. This future PE is lower than the current PE for the GB Luxury industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.02%, as per the Simply Wall St company report.

Burberry Group Future Earnings Per Share Growth

Risks

• Burberry's strategic shift towards emphasizing authenticity and core strengths, such as outerwear, aims to bolster its consumer appeal and revenue by leveraging its historic brand identity and heritage. This could enhance brand loyalty and increase sales in its stronger categories.
  
• The company is implementing cost reduction initiatives, streamlining operations, and optimizing its supply chain, which can improve net margins by reducing operating expenses and enhancing efficiency.
  
• Burberry is focusing on strengthening its presence in the U.S. market and maintaining its investments in Asia despite macroeconomic challenges. This approach can potentially stabilize and boost its earnings through diversified geographic revenue streams.
  
• The introduction of disciplined pricing strategies and a broader product assortment aims to optimize revenue potential across different customer segments. This could enhance gross margins by aligning pricing with category authority.
  
• Burberry is investing in its retail and e-commerce networks, enhancing the customer experience with initiatives like scarf bars and trench destinations. These efforts aim to increase store productivity and drive higher sales volumes.

Valuation

• The analysts have a consensus price target of £8.45 for Burberry Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £13.3, and the most bearish reporting a price target of just £4.75.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be £2.7 billion, earnings will come to £270.0 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of £9.56, the analyst's price target of £8.45 is 13.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.