Burberry still a buy underpinned by Asian middle class says the Share Centre

14th October 2014

The Share Centre says it backs Burberry as a buy despite some economic headwinds facing Europe.

Investment research analyst Helal Miah says: “Burberry reported first half numbers which were in-line with expectations and positive considering the impact of currency headwinds during the period. Revenues came in at £1.1bn, up 14% with the retail division’s sales up by 15% and the wholesale divisions sales up 13%. North American and Asian sales experienced double digit growth, the online business performed well in all regions, and the group is well placed to make the most of the coming festive trading. Also, the recent plunge in sterling is seen as a positive for Burberry”.

However Miah says that investors should note the caution expressed by management that the “external environment is becoming more difficult”.

“This is likely to refer to the weaker economic environment in Europe – where the company suffered the poorest performer in the first half.

“We continue to recommend Burberry as a ‘buy’ as the company continues its growth strategy with 20 mainline stores opening during the year and the closure of less profitable outlets. These changes are expected to contribute in the mid-single digits to the group sales and the company is well positioned to benefit from the holiday season.

Turning to the sector more generally, Miah says that while the personal goods sector in the FTSE 350 is “far from a behemoth and heavily dominated by Burberry’s performance”, it has been one of the sectors to see consistent strong growth since the recession, with annual revenues reported in the 12 months to June hitting £5.3bn – the highest in at least seven years.

The positive trend has been mirrored at the bottom line. Net profits have risen by 87.4% to £703m, as luxury good sales have benefitted from the emergent middle class in the Far East.

Miah adds: “There are certainly challenges for the sector in the short-term, with fears that the Ebola crisis may impact tourism, and therefore sales of luxury goods. Equally, signs of weakness in the European economy may continue to impact performance. Nevertheless, we believe there are solid grounds for optimism. The sheer scale of the middle class in the Far East should underpin demand. Revitalised global economic growth in 2015 would boost exports, as too would a weakened pound, if it continues along its current trajectory.”

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