Ahead of Burberry Group PLC's (LSE:BRBY) trading update on 19 January, US investment bank Stifel has cut its recommendation for the luxury fashion brand to 'hold' from 'buy' with a reduced price target for the shares, which are currently testing new three-year lows.
The decision to downgrade Burberry's stock status stems from Stifel's revised expectations for the company's financial performance.
It anticipates a 12% decrease in Burberry's earnings before interest and taxes (EBIT) for the fiscal year 2025 (FY25). This downward revision is attributed to lowered growth predictions for the second half of fiscal year 2024 and fiscal year 2025, as well as the expected negative impact on profit margins.
Consequently, Stifel's new estimates for Burberry's FY25 earnings are now 5% below the general market consensus.
Stifel's cautious stance on Burberry, and reduction of its share price target to 1,550p from 1,950p previously, is influenced by what it perceives as challenges in the brand's ongoing transformation and upgrade efforts under new leadership from Daniel Lee.
The bank notes that the current unfavourable external environment this year, along with worsening trends in the luxury fashion sector since September of the previous year, may hinder Burberry's ability to stand out from its competitors and meet investor expectations.
Despite recognising Burberry as comparatively undervalued, with autumn's interim results sending the shares shooting lower, Stifel highlights the lack of immediate factors that could kick-start the stock's momentum.
As such, it advises investors to maintain patience, suggesting that Burberry's cycle of earnings downgrades might not be over yet.
In morning trade, the stock was off 2% at 1,370.79p.