* Latest data not bad but company is not top of the pack either and new management can imply disruption initially
* GBP weakness a great support but fundamentals showing blurred lines
* Maintain Hold; increase TP to 1,650p (from 1,500p) on lower GBP and WACC despite more cautious underlying estimates
*Not an out-performer anymore
For years, Burberry was in the spotlight as its digital edge, distinctive Britishness and
product relevance enabled it to stand out with younger Asian consumers and comfortably
outperform peers. That doesn’t seem to be the case anymore. The latest data points are
nothing to be ashamed of and at the same time, we see the brand under-performing
bigger brands such as Louis Vuitton and Gucci. We believe that as industry growth is
harder to come about and core Chinese consumers have become more discerning,
Burberry’s core (trench-coats, scarves) should continue to outperform but some
diversification businesses such as handbags and accessories should remain under
pressure. The recent restructuring of the “beauty” business just three years after taking it
back could signal misplaced enthusiasm as well.
* More management disruption ahead?
A recent shake-up has seen changes for the CEO, CFO, COO, Europe head and head of
IR roles. While bringing in Marco Gobbetti from Céline (LVMH) could be a means of reigniting
excitement on the brand and bringing some increased retail expertise, it is
important to remember that he will join only in June 2017 and may well have ideas on
design, processes and many other elements at Burberry. While Christopher Bailey “holds
the fort” until then before retrenching to mostly a designer role, we would not rule out that
he may also be thinking about his next step.
* GBP weakness and lower WACC mitigated by lower underlying forecasts
We take into account a much weaker GBP than in our 6 September 2016 Panda-monium
industry report. Besides, we have decreased our WACC assumption from 9.66% to
9.10% following the decrease of the risk free rate by our strategists. While many investors
have highlighted how strong the UK has been for Burberry (not a brand specific), we have
cut our underlying estimates – notably for wholesale – as we are concerned by the recent
weakness of the brand in the US and in wholesale in general, and the lack of meaningful
recovery in Hong Kong, which contrasts with peers. Besides, while Coach (COH US, Buy,
TP USD51, CP USD35.52) could well add other brands to its portfolio like it did two years
ago with Stuart Weitzman, we thing recent discussions (see Bloomberg 21 October 2016)
that Coach could acquire Burberry are odd as we view Burberry both too big a brand and
one difficult to expand strongly, and remain convinced that M&A in luxury does not deliver
substantial synergies. Our new TP of 1,650p implies 12% upside. We rate the stock Hold
because we believe it is too early to gauge the impact of management changes.