Why Burberry's share has jumped 13% since Monday

Following Burberry’s [BRBY] most recent earnings announcement on Tuesday, investors have given a thumbs up to the brand’s turnaround plan. The luxury fashion house Burberry reported a 4% year-on-year hike in same-store sales for the latest quarter, prompting a 14% share surge to hit 2,277p by Tuesday’s close.

Retail revenues for the three months to June totalled to £498m, also up 4% over the previous year. It marked a turnaround from the previous quarter, which saw lacklustre 1% year-on-year growth, and beat analysts’ growth expectations of a 3% rise in revenues for this quarter.

CEO Marco Gobbetti credited new designs by Riccardo Tisci, the company’s creative supremo since March 2018, with the surge in sales. The proportion of new products in stock at stores finally reached “meaningful” levels during the quarter, Gobbetti said, accounting for half of inventory at the end of the quarter. The company wants to grow that to three-quarters by March 2020, and has turned to monthly product launches, advertised on platforms like Instagram and WeChat, to accelerate turnover of new lines.

Geographical mix

Burberry’s US and EMEA sales grew by single-digit percentages, supported by the weaker Pound, which incentivised tourist spend in the UK. But it was growth markets in the Asia Pacific that really shined, with mainland China posting a “mid-teens” increase in sales, more than offsetting lost business as Hong Kong shops shut down amid civil unrest in the city.

The People’s Republic has become key to the fortunes of European fashion retailers, as they try to capitalise on a shift to consumption-driven growth and a burgeoning middle class. Speaking to reporters, chief operating and financial officer Julie Brown said Tisci’s new designs, which marked a break from Burberry's historical visual branding, had found particular success among Chinese customers aged 23 to 38.

Ongoing turnaround

Tisci’s style revamp came in response to stagnant sale under previous chief designer Christopher Bailey, and is part of a wider turnaround plan at Burberry, which has entered its second year.

Along with a forecasted £200m capital spend, the company is undertaking a cost-cutting exercise expected to bring in £120m in savings by the end of the current financial year in March. Nine store closures were carried out in the quarter, out of a planned total of 38, as the fashion house seeks to “align” retailers with a redesigned store image.

Burberry’s board confirmed its guidance of “broadly stable revenue and operating profits” at constant exchange rates for the year ending March. Among risks, it cited the usual culprits in global trade: disruption to supply chain from a no-deal Brexit and escalation of the US-China trade war.

While shares reached an intraday high of 2,300p after results were released on Tuesday – the highest level in almost a year – analysts at Citi kept cautious on outlook. “It remains to be seen whether the commercial success of Burberry’s new brand identity can be sustained into the remainder of the year on a much larger share of the offering,” analyst Thomas Chauvet wrote.

“It remains to be seen whether the commercial success of Burberry’s new brand identity can be sustained into the remainder of the year on a much larger share of the offering” - analyst Thomas Chauvet

Good setup for upcoming luxury earnings

The results, particularly growth in China, bode well for Burberry’s peers, which all count on growing sales in the region to sustain earnings. Burberry’s estimates-beating update “should reassure with a healthy uptick in mainland Chinese consumption,” a note from MainFirst analyst John Guy read. Louis Vuitton parent LVMH [MC] and Gucci owner Kering [KER] are due to report results next week, and saw their stock lifted by Burberry’s update.

Burberry share price vitals, Yahoo Finance, 18 July 2019

Burberry shares have an average target price of 1,915p, according to Refinitiv, and the latest rally might spur re-ratings by analysts. The stock has a consensus forward PE ratio of 23.15, according to Morningstar, against LVMH’s 26.11 and Kering’s 19.65.