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Burberry (LSE: BRBY) stock has had a disastrous time, crashing over 70% in 18 months. This epic decline even saw the luxury fashion house relegated from the blue-chip index to the mid-cap FTSE 250.
In fashion terms, that’s a bit like going from Milan to Matalan!
Yet the stock was rising from the ashes today (14 November). As I write, Burberry’s up 20% to 879p and heading for its best intraday gain ever!
Mind you, the share price is still down 37% in 2024. But all big turnarounds have to start somewhere. Is that what we’re witnessing here? And if so, should I snap up some shares?
Optimism
In the past two years, Burberry has been hit by declining sales amid a global luxury slowdown and exceptionally weak consumer spending in key Asian growth markets, especially China.
Underlying all this has been a bit of an identity crisis. Burberry originally designed clothing to protect people from the harsh British weather, which is reflected in its success with trench coats and scarves. But it tried to move further upmarket with high-priced leather goods and this backfired.
Today, new CEO Joshua Schulman (the fourth Burberry boss in a decade) addressed this in the company’s half-year results.
He said: “Our recent underperformance has stemmed from several factors, including inconsistent brand execution and a lack of focus on our core outerwear category…Today, we are acting with urgency to course correct, stabilise the business and position Burberry for a return to sustainable, profitable growth...I am confident that Burberry’s best days are ahead.”
Optimism around this turnaround plan is why the shares have surged today.
Reality
The stock market is famously forward-looking, which is why a share price can plummet even after stellar earnings. It’s all about future expectations — the next quarter, the upcoming half, or the year ahead.
That’s a relief for Burberry today because the first half was a stinker. In the 26 weeks to 28 September, revenue slumped 22% year on year to just under £1.1bn. Sales in Asia Pacific were down 25%, and 21% in the Americas, while everywhere else fell ‘just’ 13%.
Consequently, the group posted an adjusted operating loss of £41m. That’s slightly better than analysts expected (£45m). However, Burberry achieved a £223m operating profit in the same period last year, which tells its own story.
Management is unsure if it’ll turn a profit in FY 2025 (ending March). A lot will hinge on Christmas.
Should I buy Burberry stock?
It’s almost futile to value the stock given the declining sales and earnings. We just don’t know whether things are going to improve quickly, steadily, or get worse. The dividend understandably remains suspended.
Schulman is cutting costs, with £25m in savings this year, and annualised savings of around £40m thereafter. Excess store inventory will be reduced and there’ll be a global rollout of “scarf bars“, starting in New York, as well as a necessary reassessment of product pricing.
Over time, he says the group can get back to £3bn in annual revenue. But that’ll depend on Chinese consumers opening their wallets again, and we don’t know when that’ll happen.
As we’ve seen with Rolls-Royce, a genuine turnaround is founded upon improving financial fundamentals. I don’t see that with Burberry yet, so I won’t be investing.
