Burberry

Stock price: p812
Conclusion: Strong start in Q1 coupled with the buy out of Chinese franchises lead us to upgrade our valuation target for Burberry to p900-p920 per share. As a result, we reintegrate Burberry in our invesment list.

Q1 sales: up 27% reported to £291m (+21% organic-+24% excluding Spain). guidance 2011 unchanged.

F11 numbers roughly unchanged notwithstanding a strong start.
-We have slightly increased our sales forecast for retail to account for better comparable store sales (+10% in Q1).
-Q1 growth in wholesale and licensing should not be extrapolated. Revenue in wholesale (+46% organic) benefited from the re-phasing of deliveries in the first quarter enabled by supply chain efficiencies. Sales in licensing (+14% organic) were boosted by timing differences related to the Japanese apparel licence.
-We look for £1458m sales, implying +17% sales (excluding Spain) for the rest of the year. This is clearly well ahead of competitors in the luxury sector, owing to the strong momentum of the Burberry brand.

-As to margin, we continue to expect a slight erosion due to the conjunction of higher operating expenses related to the store network expansion, start up losses in new markets and termination of licences and wholesale accounts, combined with a trading loss in Spain (included in our numbers unlike management reporting). We expect EPS to increase 6% to 37.2p (including Spain) and to jump +26% next year to 46.7p.

The acquisition of Chinese retail operations is great news.
-Burberry pays £70m from its cash resources (autumn 2010) to acquire 50 stores located in 30 Chinese cities, making £75m retail sales (year to December 2009) and £14m EBIT. A franchisee will hold a 15% stake in the business.
-The deal should be EPS neutral this year and add up to £20m to group operating profit next year, implying a better yield than the current return on cash.
-Strategically, the deal should further enhance Burberry’s medium term growth profile by increasing its exposure to Asia Pacific (28% of sale by 2012) and to retail (67% of sales projected by 2012).

Burberry trades at 22x and 18.3xP/E based on our 2010 and 2011 forecast. We think the stock deserves to trade at a premium to the luxury sector, owing to superior medium term growth potential (cf May 27 comment). Our DCF suggests around 13% upside potential.

Burberry

Stock price: p798

Conclusion: Time for a break.
Burberry has almost reached our valuation target of p800, providing 26% return in 5 months (cf previous comments). Burberry trades at 21.7xP/E based on calendar 2010 estimates. Burberry’s premium fairly reflects long term mid teens growth prospects. We feel that the stock looks now fairly priced.

Burberry

Stock price: p659
Conclusion: Great management, attractive growth story in luxury goods . We reiterate our valuation target of p790-p800 per share.

FY10: Sales up 7% to £1280m (+1% organic-5% H1 +6% H2). EPS +17% to 35.1p
Guidance F11 confirmed: +10% space in retail +10% wholesale including Spain.

Burberry has weathered the recession particularly well
-Sales have resisted thanks to retail (up 15% organic). Same store sales grew 7% (H1+2% H2+10%), combined with 8% new space. Wholesale and licencing were more affected, declining by 15% and 6% respectively.
-Retail/Wholesale margin bounced back 180bp to 11.6%, driven by a sharp upturn in gross margin (+760bp) partly offset by higher operating expenses. Gross margin benefited from improved pricing, less clearance, cost efficiency and the switch from wholesale to retail.
-Net cash position at 31 March was £262m, vs £8m a year ago. FCF reached £300m (£120m F09) helped by improved working capital (+184m inflow) and lower capex.
-EPS exceeded expectations, increasing by 17% in F10.

F11: Accelerating Investment-Fixing Spain
-Increasing investment. Capex will almost double to £170m, with 20-30 new mainline stores (131 currently) in Americas and Asia. Start up losses in Latam, India and Japan will increase £5m. Operating expenses in marketing, sales and distribution will be up as a percentage to sales ( around 50% vs 48.1% F10). Termination of licences and wholesale accounts should cost the group £5-10m.
-The negative impact on margin will be partly compensated by improved gross margin thanks to higher full price sell-throughs and sourcing benefits.
-The restructuring in Spain should lead to 50% fall in revenues and a trading loss of £10m, as retail and wholesale move from local to global collection.
-Looking for double digit growth top line and mid single digit bottom line. Sales could reach £1450m in F11 (up 13%, +9% organic), margin in retail/wholesale should slightly erode (40bp to 11.2%) as a result of growth initiatives taken this year, EPS could increase 6% to 37p (we include trading loss in Spain) and return to mid teens growth in F12.

Longer term: mid teens growth prospect
-New retail space should add 10% growth for the next three years.
-Wholesale remains underpenetrated in the US (7% of sales) and in Asia.
-Non apparel gaining share (35% of sales)
-Menswear to benefit from the first global collection following the non renewal of licences.
-Childrenswear (4% of sales) could represent 10% of revenues over time.

Burberry trades at 18xP/E and 9xEV/EBITDA based on 2010 calendar estimates. We expect the stock to further re-rate based on its superior EPS growth potential. Our valuation suggests 20%+potential return.

Burberry

Stock price: p695.5
Conclusion: Burberry performed remarkably well during the crisis. Burberry’s business plan offers mid teens EPS growth for the years to come driven by retail expansion, product diversification and restructuring in Spain. Notwithstanding the cost attached to the restructuring of Spanish operations in fiscal 2011, we expect the stock to further rerate to p790-p800.

H2 Trading update: Sales up 7% reported (+6% organic). Exceeding the top end of PBT consensus estimates (£200m) for the full year. Guidance 2011: 10% increase in retail selling space-10% increase in wholesale in H1 including Spain-licencing to decline between 5-10%

H2 growth bodes well for Fiscal 2011.
-Consumer are coming back with Retail sales up 15%, driven by 10% comparable store sales. Asia Pacific and Europe were up double digit, while America returned to mid single digit growth thanks to improving trend in Q4.
-Wholesale declined by 6%,better than expected partly due to the closing of some accounts and weakness in Spain. Excluding these factors, wholesale grew mid single digit in H2, which again is encouraging. Licencing declined by 6% in line with guidance.
-Earnings should be slightly above the top end of market consensus (£200m PBT) thanks to higher selling prices and improved gross margins. We expect adjusted EPS to achieve p33.7 in fiscal 2010 (+11.9%).

Looking for mid teens EPS growth medium term
-Sales to be driven by retail. New space could add 8-10% growth pa, combined with 5-7% comparable store sales.
-Room left for expansion in wholesale, notably in the US where Burberry projects to double sales, in China where franchised stores are growing rapidly.
-Successful diversification in accessories.
-Restructuring of Spanish operations. Burberry will align Spain (9% of sales) with its global business model, implying the cessation of its local collection after winter 2010, the introduction of its luxury global collection in summer 2011, the closure of its facility in Barcelona and the streamlining of its distribution network. In addition to the one off charge estimated between £50-70m, Burberry is expected to incur higher trading losses in 2011 than in 2010.
-All in all, EPS growth could be lower than top line growth next year (+9.7% vs +13.4% sales), owing to Spain. We expect a return to mid teens EPS growth in fiscal 2012.

Burberry trades at 19.2XP/E and 10.8XEV/EBITDA, implying that it is no longer trading at a discount to the luxury sector. Nevertheless, we see further upside based on superior medium term growth for the brand. Our valuation target suggests 15% return for the next 12m.

Burberry

Stock price: p634
Conclusion: Q3 numbers were, once again, better than expected (up 12% like for like), leading us to upgrade our EPS estimates for F2010 and F2011 by around 10%. We think the current 10% discount to the sector offers a good entry point, based on our revised valuation range of p720-p740.

Q3 trading update: Sales up 15% reported to £380m (up 12% underlying). Guidance F2010: EBT towards the top end of £175-200m consensus range estimate.

Notwithstanding its exposure to Japan and Spain and the negative impact of wholesale, Burberry should increase EPS by around 9% this year, thanks to excellent retail sales, higher profits from licencing and positive forex.
Retail sales grew by 22% in the first nine months, helped by double digit comparable store sales growth in Q3 and +8-10% full year increase in selling space. Higher retail sales (+19% full year) should more than compensate lower wholesale revenues (-10-12% like for like) due to the closing of certain accounts and further weakness in Spain. The decline in licencing revenues (-5-10%) should also be offset by stronger hedging rate and higher royalty payments. Marginwise, we expect the gross margin to bounce back in H2, helped by tighter inventories and lower clearance activity.

High single digit growth in sales and double digit growth in EPS for the medium term looks realistic
-Retail (57% of sales) should continue to grow double digit, helped by 8-10% increase in selling space. Burberry ran only 122 mainline stores at the end of September 2009. Comparable sales growth offers a relatively good visibility due to its leadership in outerwear combined with diversification in accessories . Wholesale could resume growth next year, following the cleaning of the network while Spain could benefit from easier comparison. Burberry keeps gaining share in the US, where management projects to double sales. The Chinese network could reach 100 franchised stores. Emerging markets accounted for only 10% of sales in H1.
-Despite the cost attached to the opening of new stores, we expect margin (10% excluding licencing) to start to improve, helped by higher gross margin and the expected turnaround in wholesale.

Burberry trades at 17.3xP/E and 9.8xEV/EBITDA based on calendar 2010 estimates, implying 10% discount to the luxury sector. We find the stock attractive based on our fundamental valuation (p720-p740). Last, Burberry’s unique British heritage makes it a potential acquisition target.

Burberry

Stock price: 573p

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 childrenswear (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 pa 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.

Burberry

Stock Price: 565p
Conclusion: Trading update leads us to upgrade our F10 estimate by 5.6%. Burberry 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.

Burberry

Stock Price: 421p
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 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 13.9x2010e, 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.

Burberry

Stock price:367p
Conclusion: Stock close to our fair value estimate (400p)

Second Half Fiscal 2009 (end of March) trading update.

Burberry reported 2% underlying growth in sales in H2 (+7% for the full year) and confirmed PBT guidance range between £150-190m (vs £195m last year).

Second half growth seems remarkable considering the conjonction of negative factors having affected the group. First, the overall decline in demand for luxury goods. Second, the weakness of the apparel category, which still account for around 70% of Burberry sales. Thirdly, Burberry’s exposure to Spain (12% of sales in fiscal 09).

14% growth in Retail more than compensated for the double digit decline in wholesale and in licence revenues. Growth is driven by the opening of new stores and also a return to positive comparable store sales in Q4 (+3%), which was not expected. Burberry is gaining share in Europe and in the US.
Burberry ended the year cash neutral and inventories were reduced by 10% at constant exchange rate, despite double digit space growth, which indicates that supply chain and IT investments are paying off.

Management warned that sales in Fiscal 10 will once again be impacted by double digit decline in whole sales (-25%) and in licence revenues. However, retail should once again be boosted by space growth (+12%) Assuming 2% decline in comparable, we forecast underlying growth to be down 3,8% (-1,8% excluding the one off impact of cleaning the wholesale network).
However, forex shoud continue to positively impact sales by around 9% based on today’s spot rates, leading to 5% reported sales growth.
Gross margin should improve helped by positive forex, while the costs attached to the extension of the retail network should be offset by the expected £50m savings from the restructuring programme. PBT could achieve £220m in fiscal 2010. However, P&L improvement is expected to be second half weighted.

Burberry trades at 11x 2009 estimates (calendar) and 9.3x 2010, which is not expensive for the sector. DCF value leads to around 400p fair value.
However, the stock price might consolidate in the short term following a strong recovery since January (+64%).