RBC Capital Markets has removed Burberry Group PLC (LON:BRBY) from its list of large-cap stocks it would sell short.
The stock has fallen 21% since the end of August so the broker now sees little trading benefit from “shorting” the stock – the practice of borrowing stock and selling it in the hope of buying it back cheaper later.
READ: Burberry unveils flat sales as tourism demand softens in the UK and Europe
It still has a bearish ‘underperform’ rating on the stock, even though the share price of 1,742p is below its target price of 1,875p.
“On a relative basis, we stick to our Underperform rating on Burberry Group given that the brand is more exposed to slowing demand in China (above average exposure to Chinese cluster at 40% of global sales) and the risks of repositioning the brand into luxury fashion against a highly competitive backdrop that should require a step-up in reinvestment,” RBC said.
.@Lara_Mullen celebrates the launch of #BurberryHer at our house party in London last night #BurberryBeauty pic.twitter.com/jeTRVDrq10
— Burberry (@Burberry) October 11, 2018
It continues to see the stock offering below-sector average growth in the medium term with above-average execution risks at a premium valuation versus its peers.
It continues to see greater upside elsewhere, notably with online specialist ASOS PLC (LON:ASC), which is its top large-cap pick in the sector.
“We remain bullish on ASOS as we view the company as a best-in-class operator and expect the group to continue delivering sustainably high levels of growth owing to a large market opportunity and a competitive ever-improving proposition,” the broker said.
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— Jenni Worldwaker (@fauxe_y) October 11, 2018
Recently, ASOS’s share price has been pressured on the back of concerns over increasing investments necessary to sustain growth, especially following Zalando’s margin rebase; however, RBS is confident that margins are sustainable as ASOS continues to benefit from operating leverage, greater buying power and increasingly automated warehouses that are driving efficiencies.
“Our recent online delivery and returns solutions comparison survey confirms that ASOS has been seeking ways to improve its proposition profitably,” RBS said, as it reiterated its 7,700p target price.
In contrast, it is not overly enamoured of Boohoo Group PLC's (LON:BOO) ambition to be the best-in-class internet fashion retailer globally.
Achievement of the target will come at a price, in RBC’s view.
“We, therefore, believe incremental investment in the business is a question of when, not if,” RBC asserted.
Boohoo’s share price has outperformed its peers following solid interim results, with the PrettyLittleThing brand’s top-line growth beating consensus expectations as flagged warehouse disruption had less of an impact than anticipated.
READ: Boohoo raises revenue guidance after a storming first half
RBC remains cautious on the stock as it does not view management’s strategy of taking a less promotional stance to compensate for higher investments in other areas of its proposition as sustainable.
“We believe this strategy could erode the brand's competitive advantage (and unique selling point) on price, increasing the risk to revenue growth,” RBS opined.
The 160p target price is well below the current price of Boohoo, even after today’s 7.4p fall to 212.5p.
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— boohoo.com (@boohoo) October 15, 2018