Reflecting on those Burberry numbers #BRBY
Recent travel commitments, followed by a brief (and thankfully non-fatal) illness, have left me behind in terms of covering some of my portfolio holdings here.
One of the stocks I particularly want to catch up on is Burberry, which released preliminary results last week (latest share price £17.76p, market cap £7,300 million).
The market reaction on the day was moderately negative, but the share price remains range-bound on a six-month view:
Let’s consider the main features of the results.
Revenue and profits: in line with expectations
- Full-year revenue was down 1% at constant exchange rates.
- Within this, retail comparable store sales were up 2%.
So all very flat, as expected.
Profits didn’t move much either, depending on how you measure it:
- adjusted operating profit flat at constant FX (down 6% at reported FX)
- statutory operating profit up 7%.
The movement in statutory (what I call “actual”) operating profit is a lot better than the movement in “adjusted” operating profit. This was due to fewer adjustment, namely:
- Much lower restructuring costs (£12 million versus £54.5 million in the prior year)
- No charges relating to the disposal of a division (which happened in the prior year), no goodwill impairment, and no special tax benefit from reduced US taxes.
While some investors might not value these improvements highly, I think it reflects very well on Burberry that it managed to produce such clean accounts this year. The difference between “adjusted” operating profit and the actual operating profit is just £1 million, consisting of £12 million in restructuring costs offset by £11 million in exceptional gains. Pretty remarkable for a £7 billion enterprise!
While it’s true that top-line growth has been absent, Burberry reports that it has made good progress in cutting back on its overhead expenses. It is now targeting £135 million of annualised cost savings for FY 2022.
Will this number flow down to the bottom line and boost EPS? No, not exactly. £105 million of annual costs have been saved so far, and have been “largely reinvested into consumer facing activities”. So the way I think about it is that there is a shifting of cost from central overhead out to the stores, where it should have tangible benefits for customers.
I’m encouraged that Burberry is controlling its costs, looking for even more cost savings, and maintaining guidance for broadly stable revenue and adjusted operating margin at CER (constant exchange rates) in FY 2020.
There is unfortunately a more pronounced H2-weighting expected for FY 2020, which usually raises the risk of a profit warning and may explain the share price weakness on the day of this announcement. The only reason given was the “strong comparator” in FY 2019.
Not much has changed, but a couple of things worth commenting on:
- Gross margins are expected to fall 100bps this year, with the company spending more on product. This follows a fall of 100bps in FY 2019, for the same reason. Personally, I don’t mind the company giving up some margin for the sake of product quality. We have an enormous 68% margin to play with.
- Adjusted operating profit margin: 16.1%, down 100bps. I think the FX drag is largely responsible for this. The company confirms that the adjusted operating margin would have increased 10bps at constant FX.
- Cash conversion of 93%, not as good as last year which benefited from some exceptional movements. This year, there was a “product transition” under the new Chief Creative Officer, and inventory has increased 10%.
- Free cash flow of £301 million, leaving net cash of £837 million. The company will make another £150 million share buyback and increases its dividend.
There was little in these results to change my stance. The company appears to be executing its plans as I would have hoped. The new Chief Creative Officer is perhaps the main risk factor. The signs around him seem mostly positive to my untrained eye, though we need to watch out for possible softness in H1 FY 2020, as his new products will need to work hard if the company is going to match H1 FY 2019.
Meanwhile, the financials continue to look attractive to me.
Burberry’s EPS came in at 81.7p, and is forecast to rise to 83.2p in the current year, putting the shares on a current-year P/E ratio of 21x. The heavily diversified Louis Vuitton (Paris:MC), trading at c. 23x, might make for a more relaxing entry to the luxury sector.
At the time of publication, the author has a long position in BRBY.