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Questor: Burberry has refashioned its business model and merits a premium valuation. Buy
Questor share tip: the fashion chain’s design chief has been a hit with customers and the firm is adopting a more upmarket feel
Just as fashion evolves, so too does Burberry’s business model. In the 20 months since Questor cautioned readers over its change of management and lofty valuation, the global fashion brand has reinvented itself.
Central to its new identity is a rejuvenated product line-up. Around 70pc of the products it sold in the first half of the year were designed by its chief creative officer, Riccardo Tisci. They have proved extremely popular and delivered double-digit percentage sales growth in the first half of its financial year.
As they gradually account for a higher proportion of the goods sold by the business, their impact on sales could be compounded in future quarters.
Burberry’s products are not only new but increasingly innovative.
For example, the firm recently presented its first carbon-neutral fashion show. It is also using recycled materials, such as fishing nets and industrial plastic, in its products to enhance their environmental credentials.
This strategy resonates with consumers at a time when concerns over the environmental and social impact of consumer goods are unlikely to fade.
Such concerns are especially prevalent among the younger people Burberry is increasingly targeting.
It is therefore investing heavily in “influencer” marketing and its social media presence. This includes partnerships with Instagram and WeChat, a similar service, to offer shopping experiences within social media channels.
Questor believes this approach is likely to pay dividends, since growth in the global luxury consumer goods sector was mostly driven by shoppers aged under 40 in 2018. Future growth may also be centred in major Asian economies such as China, where Burberry is investing more.
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It recently struck a deal with Tencent, the Chinese technology specialist, to develop a social retail concept in the world’s second-largest economy. The two businesses will blend social media and retail to create differentiated shopping experiences that will start with a new store in China in the first half of next year.
This forms part of Burberry’s wider strategy of seeking to improve the customer experience.
It includes an increasingly personalised online and in-store one-to-one service that, for example, allows sales people to communicate directly with customers via a mobile app.
This represents a shift towards a premium offering from the business. It is concentrating investment on higher-end shops as part of a focus on being a luxury consumer brand, while its new products are now frequently more expensive than in the past.
In tandem with raising prices, the company is seeking to reduce costs: it is on track to deliver cumulative annualised cost savings of £135m in the 2022 financial year.
Ongoing store closures mean that its global footprint is becoming more biased towards faster-growing markets such as China.
While this may catalyse Burberry’s sales performance in the long run, Questor believes it could present challenges in the short term, while its sales in Asia have been affected by the civil unrest in Hong Kong.
This threat may remain in place next year. So too could general uncertainty regarding the trade war between the US and China.
This could hurt sentiment towards the stock at a time when it trades on a relatively high price-to-earnings ratio of 24.9 – higher than that of many FTSE 100 peers.
In terms of Burberry having a premium valuation, little has changed since our previous tip. However, its revised strategy fundamentally changes its market position and growth potential.
Over time, this could prompt rising profits and make the stock even more fashionable among investors.
Questor says: buy
Ticker: BRBY
Share price at close: £21.20
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.