Burberry Group PLC’s (LON:BRBY) earnings momentum is poised to re-accelerate after three years of disappointing sales, Goldman Sachs said as it upgraded the stock.
Goldman raised its rating on Burberry to ‘buy’ from ‘hold’, added the company to its conviction list and lifted its target price to 2,395p from 1,797p.
Shares rose 1% to 1,684p in morning trading.
In early March, Burberry appointed Riccardo Tisci as its new creative chief to succeed Christopher Bailey. He has been brought in by the new chief executive, Marco Gobbetti, the former boss of Givenchy where they worked together.
READ: Burberry unveils former Givenchy designer Riccardo Tisci as its new chief creative officer
“The brand is currently in transition - post new management and the recent appointment of a new creative director in order to re-accelerate brand momentum post three years of underperformance as measured by sales growth versus the broader luxury peer group,” Goldman said.
Following three years of “disappointing” like-for-like sales momentum due to a negative price mix and weak volumes, Goldman said it thinks earnings will pick up on the back of Burberry’s plans to revive the brand under Tisci.
Goldman predicts flat earnings growth in fiscal year 2018 but believes “this will mark the trough” and expects a 15% earnings per share compound annual growth rate from 2019 to 2021.
Cost cuts to boost earnings
“While we acknowledge the impact of lower structural growth for the apparel market (greater competition and lower pricing power), which represents about two thirds of Burberry’s sales, the company has clearly lost ground to brands such as Gucci over the past two years (whose sales increased 45% underlying in FY17 vs. Burberry at 1%, calendarised),” it said.
“However, initiatives to boost earnings momentum and cut costs introduced under the prior CEO and Chief Creative Officer Christopher Bailey show signs of acceleration under the leadership of CEO Marco Gobbetti (who joined Burberry in January 2017 and became CEO on July 5, 2017) and CFO Julie Brown (January 2017).”
Burberry has raised its cost savings plans to £120mln from a previous £100mln by 2020, Goldman highlighted, adding that Tisci’s appointment is the precursor to new product to improve brand momentum.
Goldman expects the first collection under Tisci to be presented at the September runway show, which will be products for Spring/Summer 2019.
E-commerce deals key to Burberry sales growth, says Goldman
Last month, Burberry announced that it will team up with online retailer Farfetch to make all of its products available to internet shoppers in 150 countries.
The use of third party platforms to expand distribution provide the key to Burberry’s sales growth, Goldman said.
“Burberry is already regarded as a leader in digital across the luxury peers (early implementation of e-commerce, launching on TMall in 2014), but digital-related sales (brand.com, collect in-store) have remained broadly unchanged – 10% we estimate,” the bank said.
“We see agreements with multibrand platforms as being capable of accelerating retail revenues and increasing Burberry’s addressable market base with a younger consumer - a potential win win.”
The bank forecasts margins will improve by 430 basis points over the next five years in the core retail and whole businesses, boosted by so-called ‘e-concessions’ - retail structured online agreements on multibrand platforms.
Excluding the sales opportunities the bank sees through third-party platforms with retail structured agreements, it predicts the retail/wholesale operating margin to increase to 17.9% in 2024 from 14.8% in 2019.