Burberry shares dive on strategy shift but Frere boosts his stake

Burberry shares continued to fall on Friday as investors showed they were nervous not only about the prospect of change at the company but also about the hundreds of millions (possibly £210 million a year in the medium term) that the transformation plan will cost.


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But were they right to be nervous or was this simply people reacting badly to the unexpected, along with a natural correction to a share price that has risen fast in the past year? And with one savvy Belgian Billionaire investor actually raising his stake following the strategy announcement and share price fall, the latter view looks like it might be the right one.

Through his Groupe Bruxelles Lambert (GBL), Albert Frere increased his stake to 6% from 4% on Friday and now has double the holding he had when it was first revealed he had bought Burberry shares back in February. 

Analysts said his confidence in the company could be a catalyst for others investors to return to the firm. Berenberg analysts said his purchase underlines their own view that the luxury giant “is on the right path to long-term success.”

CHALLENGES AHEAD

Burberry’s shares have been recovering steadily this year after they had earlier dropped on the back of a sluggish Chinese market and a less-than-successful beauty operation.

But having risen 33% this year and reaching an almost-three-year high late last month, the roughly 13% fall on Thursday and Friday was far from disastrous. And it’s still an expensive share to buy in terms of the share price-to-earnings ratio.

But does the fall mean all those other investors apart from Albert Frere think the change is wrong and won’t succeed? Yes and no. Share price fluctuations can be as much about irrational emotions as logical analysis and opinion appears to be divided on the wisdom of the move. 

But the fall did nonetheless reflect the scale of the task ahead of CEO Marco Gobbetti and the as-yet-unknown new creative director who will take over from Christopher Bailey next March.

The company is still challenged in the hugely important US market. It gets around 20% of its sales there and 30% of those come from department stores. 

This is a much higher percentage than luxury peers such as LVMH and Kering and means that not only is Burberry more exposed to a currently-very-weak channel, but will also sacrifice a higher percentage of sales as it exits many of these stores.

The company is also predicting that it won’t see global sales or margin growth until fiscal year 2021. Plus it still has to replace the man (Bailey) who has steered it through a period of huge growth for almost 17 years.

Some analysts have cited Mulberry’s ill-fated attempt to move even further upmarket as an example of why Burberry shouldn’t do it. But with all respect to the smaller brand, Burberry isn’t Mulberry. Burberry is much, much bigger, has a lot more resources at its disposal, is much more global and is also firmly anchored in the ultra-luxury sector already.

And in focusing more heavily on that extreme luxury sector, Burberry’s strategy does make sense. It’s already seeing a recovery in most of the Asian market and said that “top-spending” shoppers are coming back, which means higher-priced, higher-margin products are doing better than ever.

And luxury growth is accelerating. An Exane BNP Paribas report said it’s growing at its fastest rate for several years with 6% growth in 2017, despite macro-economic turbulence globally.

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