As you may recall from past articles, I am bearish on the retail sector. With constant takeover speculation and the headwinds of rising utility/energy bills, coupled with high levels of consumer debt, I believe overall valuations are expensive. However, if pushed to invest, I would avoid luxury goods companies – which are notoriously cyclical – and instead concentrate on those businesses with strong value propositions and expanding internet operations, such as Tesco. Indeed, if there is a downturn in the global economy, causing, say, a rise in unemployment, then I expect consumers to down-trade and become much more price-conscious. However, this hasn’t happened just yet. In fact, with stockmarkets rallying, it seems as though the euphoria is again – albeit temporarily – boosting UK house prices and sales of luxury goods such as this iconic brand:
Turkey of the week: Burberry (BRBY, 538p), tipped as a BUY by The Daily Telegraph
Certainly, gauging from Burberry’s trading statement last week, people are not tightening their belts. Sales of its famous camel, red and black check garments are performing well, with underlying revenues rising 10% on “continued strength in outerwear and womenswear”. For instance, one of the most popular accessories this year has been the £750 Manor handbag promoted by Kate Moss. The shares jumped 8% on the day.
Burberry’s strategy has been to convert its iconic name into a global fashion house servicing the mid-luxury market, which has recently been vacated by many prestige brands as they move their price points higher. Clearly, with a background of booming sales of up-market goods, this strategy is working. Nevertheless, I cannot see how these benign conditions are sustainable in the longer term. To me – although I don’t pretend to be a fashion expert – this level of extravagance is a sign that we’re approaching the end of the party.
Additionally, there is a danger that by moving more into the mid-market, Burberry’s cache will become diluted. Indeed, this is of particular concern when it comes to the mass adoption of its trademark tartan by so-called ‘chavs’. In the fickle world of fashion, tastes change quickly, particularly if a brand’s scarcity value is eroded by over-exposure.
In relation to valuation, the shares, at 538p are trading on p/e ratios of 20.5 and 16.8 for this year and next. To my mind, this is simply too rich, especially as I think we’re reaching the top of the economic cycle. On the upside, there is always the chance that the company could be taken-over by, say, PPR. However, I believe that the likelihood of this happening is low, as the French group effectively passed up the chance to acquire Burberry when it was struggling in recent years.
Recommendation: TAKE PROFITS at 538p, and find better value elsewhere