Fashion tastes might flip quickly, but the fortunes of Burberry have not. The collapse in Chinese sales caused by the pandemic and a style drift away from the fashion house’s British roots have hamstrung earnings growth. But there is reason for investors to be hopeful.
A 1 per cent rise in underlying sales during the final 13 weeks of last year was weaker than analysts had expected, a narrow miss caused by a 23 per cent fall in sales within mainland China. Before the pandemic, China accounted for about 40 per cent of sales; that has shrunk to roughly 25 per cent. The lifting of Covid restrictions has spurred early signs of improved shopper visits to stores on the mainland, as well as in Hong Kong and Macau.
The return of Chinese travel outside Asia would be another easy fillip to sales over the next financial year. Before the pandemic, roughly half of purchases by Chinese customers were made while they travelled overseas. More visits to stores in Macau and Hong Kong have not yet extended to Europe or the Americas. Only 2 per cent of sales to Chinese customers were made while they were outside the country.
Sales in the Americas have improved, down 1 per cent in Burberry’s third quarter against a 4 per cent contraction during the first quarter. Sales in the Europe, Middle East and Africa regions were also ahead by almost a fifth on the same time in 2021.
The shares have gained almost 40 per cent since Jonathan Akeroyd, chief executive, took over from Marco Gobbetti in April last year, but investors are still reticent about placing a higher valuation to the FTSE 100 group’s turnaround prospects. A forward price-earnings ratio of 18 is still below the shares’ long-term average and the brand’s valuation also trails the earnings multiples attached to luxury rivals such as LVMH, the home of Dior and Louis Vuitton, and Prada, the Italian fashion house.
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There are a few good reasons for the British group’s discount. Burberry is without the premium status of titans such as LVMH, Prada and Hermès. Sales at LVMH have grown at a compound annual rate of 5 per cent over the past five years. For Burberry? They are flat over the same time period. Demonstrating progress against the ambitious targets set out by Akeroyd in November is crucial to help to close the gap. Top of that list is hitting £5 billion in revenue. But the goal is a lofty one — analysts forecast Burberry to exceed £3 billion for the first time this year.
How does Akeroyd hope to reach that goal? By bringing the focus of the brand back to more recognisably British designs. He has replaced Riccardo Tisci, the creative chief, with Daniel Lee, the British designer. Within that, the aim is to lift sales of more profitable handbags, belts and scarves to more than half of sales and to boost the operating margin to 20 per cent this year and even higher over the next five years.
Overseas buyers have been less keen to flock to London stores than those in Paris or Milan, a consequence of the scrapping of the VAT export scheme, which exempted foreign visitors from paying tax on purchases, reckons Julie Brown, the outgoing finance chief. They want to buy the brands local to the country they visit, she says, so doing away with the tax relief has diminished the “home advantage” of its UK stores.
The surge in infections that has accompanied the reopening of the Chinese economy represents the biggest threat to a recovery in sales. The lunar new year is also ten days earlier than last year, which means some sales might have been pulled forward. But at the present price, the odds look weighted in its favour.
ADVICE Buy
WHY The reopening of China could spur a recovery in sales — and the shares
Vistry
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Vistry is about to face the first real test of whether the resilience long vaunted by the housebuilder will transpire. The message is that a greater exposure towards social and private rental housing through its partnership division insulates the group against the worst of the downturn in demand from owner-occupiers.
True, the partnership part of the business has suffered less in the wake of the mini-budget chaos and the sharp rise in mortgage borrowing costs. Forward sales for the standalone Vistry part of that segment ended last year about a quarter higher in value. But that wasn’t quite enough to offset the decline in demand in the private housing market, which meant overall forward sales edged down slightly.
If you include the Countryside business — an all-partnership operation, acquired in November — houses built on mixed-tenure sites accounted for almost 80 per cent of forward sales at the end of last year. A target to pre-sell at least 50 per cent of homes on each partnership site is on track, but those inherited from Countryside are further behind.
Housing associations and other registered providers aren’t immune from the economic pressures facing ordinary buyers. Private rental developers, which account for 15 per cent of Vistry’s sales, have been seeking more favourable terms to compensate for higher funding costs and the broader slide in house prices.
Analysts at Peel Hunt cut their pre-tax profit forecasts for this year and next by 16 per cent and 14 per cent, respectively, to £475 million and £540 million, still ahead of the £418 million of last year.
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Vistry has slowed the pace of buying land, but it has not come out of the market altogether. Instead, it is seeking to secure new plots on a “buy now, pay later” basis, the idea being that planning permission can progress without tying up so much capital. There is the chance that a net cash balance of £155 million could rise further over the next 12 months as expansion plans retrench.
The question is whether demand from owner-occupiers slides so far that partnerships can’t make up the slack. But the latter is a helpful differentiator from the sector.
ADVICE Hold
WHY Partnerships might help to mitigate some of the pain of a housing downturn
