Kepler Cheuvreux has cut its stance on Burberry Group PLC (LON:BRBY) to ‘reduce’ from ‘hold’ on valuation grounds despite raising its target price and estimates following the luxury goods firm’s latest trading update.
In a note to clients, the French broker’s analysts noted that the FTSE 100-listed firm’s April-June like-for-like sale growth of 3% was in line with consensus expectations and above their estimates for 1% growth.
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They pointed out that Burberry’s management also reiterated guidance of “revenue and adjusted operating margin expected to be broadly stable year-on-year at constant exchange rates”, but also mentioned easing of currency headwind, so the £25mln negative impact on underlying earnings (EBIT) could be lowered.
As a result, the analysts said they have lifted their earnings forecasts for Burberry by around 1.5% for 2018 and by 3.4% for 2019 and raised their target price to 1,870p from 1,640p.
However, the analysts noted: “Since March 2018, the share price has enjoyed a strong rally, carried by expectations for the new designer’s collections.”
They added: “Current valuation implies a return to more positive trends as soon as next year, and we believe there is some risk of disappointment as turnaround stories often take more time than anticipated.”
The analysts said: “We have little doubt that the brand will eventually become more attractive. The question is when.”
They added: “We expect brand momentum to remain unsettled for several months and see only limited room for improvement since it will take some time for the developments made by the company to pay off.”
New collections eyed
“In the longer term, we expect sales and margins to increase, as the plan will gradually deliver its full potential, both on cost savings and new collections by Riccardo Tisci being implemented as soon as September 2018.
“We will closely monitor trading updates, chasing the first sign of improving sales momentum.”
They noted that Burberry shares now trade at a 2019 estimated price/earnings of 27.1 times, in line with the luxury sector average, however, visibility for this year remains low which, in their view, could justify a discount.
They concluded: “While it is true that Burberry could become the next turnaround story in the luxury goods environment, we remain on the side of caution and believe markets are already pricing in positive news but none of the negatives.”
By mid-morning trading on Wednesday, Burberry shares were 3.1% at 2,035p.