Burberry Group PLC (LON:BRBY) has a unique standing as the sole British luxury brand of its size but has it has seen a prolonged underperformance and its rebranding efforts will take time, Jefferies said in a note to investors.
“As a result, we see limited upside in the stock at this time and initiate with a ‘hold’ rating,” Jefferies said, issuing a target price of 1,650p.
The broker believes the fashion brand has underperformed since the departure of former chief executive Angela Ahrendts in 2014.
Ahrendts, who led the company’s transformation into a modern fashion label, left to take a job as the head of Apple’s retail division.
New chief executive
Christopher Bailey took over from Ahrendts as chief executive but has now decided to hand over the reins to Marco Gobbetti.
READ: Burberry reveals surprise departure of Christopher Bailey, its chief creative officer and previous CEO
Bailey will stay on as president and chief creative officer until March 31 when he steps down from the board.
“The decision to implement a major management reshuffle (with the side effect of the exit of Bailey as creative director) is a plus, and we think incoming talent is high profile with solid track records,” Jefferies said.
“The issues are complex: from poor sales densities (probably excessive sqm) to confusing product profile and pricing to a subpar supply chain and a lost edge in digital.
“The new CEO (Gobbetti, Italian) is well aware of the challenges and has asked the market for patience as remedies are sought.”
Burberry rebranding
Burberry in November announced plans to take the brand more upmarket with higher prices and profit margins. It plans to spend millions of pounds refurbishing its stores and will stop selling its trench coats and handbags through some department stores.
READ: Burberry shares plunge as it unveils new strategy and reveals slowdown in UK sales
“The need to reposition the brand is obvious, as well as to adjust the mix and pricing (more leather, higher price points) and improve communication and store experience,” Jefferies said.
“That said, moving up in the Luxury Pyramid is tough and carries risks as it is not Burberry’s natural habitat.”
Gobbetti has said his ambitious plan would take at least two years to complete, which Jefferies thinks is “sensible but hardly conducive to premium multiples at this time”.
Jefferies also thinks Bailey will be hard to replace as creative director but this is not what investors should focus on.
“Risks include foreign exchange, failure to implement the new strategy or for it to succeed, talent exit and excessive expectations,” Jefferies added.
Shares in Burberry were little changed at 1,578p.