Burberry share price crashed by more than 4% on Friday after the company warned about growth as inflation bites. The company also highlighted the difficulty of operating in China amid the recent lockdowns. BRBY is trading at 1,586p, which is about 27% below the highest level in 2021.
Luxury goods growth is slowing
Burberry is an iconic British luxury brand valued at over £6.3 billion. The company sells luxury items like clothes and accessories in key markets like the UK, US, China, and Switzerland.
Burberry and other luxury brands did well during the Covid-19 pandemic as the number of wealthy people jumped sharply around the world. Think of all stock and crypto millionaires that were formed in 2020 and 2021.
Recently, however, most luxury brands have seen a strong slowdown in the past few months. Besides, cryptocurrency prices have crashed while the value of most stocks has dropped by more than 30% from last year’s high.
This explains why most luxury groups like Kering, Hermes, Richemont, and LVMH have seen their shares plummet. Another reason why Burberry share price has plummeted is China.
Burberry earnings review
In a statement on Friday, Burberry said that its revenue for 13 weeks that ended on July 2 rose to £505 million from the previous £479 million. The 1% comparable store sales happened even as China locked down key cities like Shanghai in Q2.
Outside China, its comparable store sales rose by 16% in the quarter. Asia Pacific declined by 35% because of China while America’s dropped by 4% due to tough comparatives. As you recall, many companies saw strong growth in Q2’22 because of the vast stimulus by the American government.
The slowdown in Asia and America was offset by two key things. First, its EMEIA business grew by 47% as tourism in the region bounced back. Most importantly, the strong dollar was a positive factor for Burberry. This is notable since the company reports in pounds. In a statement, the CEO said:
“Our focus categories, leather goods and outerwear continued to perform well outside of Mainland China and our program of brand activations boosted customer engagement. While the current macro-economic environment creates some near-term uncertainty, we are confident we can build on our platform for growth.”
Is Burberry a good investment?
Burberry has been a painful investment for most long-term investors. For one, while other luxury groups like Hermes and LVMH have soared, Burberry share price has crashed by 2.7% in the past five years.
Burberry’s management has been turning around the business. They realize that the company lost the plot by attempting to cater to everyone. While this trend increased its volumes, it made it lose its brand value.
While the management has made progress, there is a feeling that this turnaround is taking much longer than expected. A common view is that most luxury shoppers are turning to other firms like Kering and Hermes instead. As an aging brand, the firm is struggling to attract many young shoppers.
At the same time, Burberry’s valuation metrics are not all that attractive to a potential acquirer. As shown below, the company’s PE and EV multiples have jumped above their sector median. Therefore, while there is interest in UK companies among PE buyers, there are risks of a deal being made.
Burberry share price forecast
The BRBY share price has been in a strong bearish trend in the past few weeks as growth slows dramatically. The stock has formed a falling channel that is shown in blue. It is now slightly below the upper side of this channel.
Also, it has moved below the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved slightly below the neutral point. Therefore, there is a likelihood that the Burberry stock price will continue falling as sellers target the key support at 1,400p.
