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Fears over Chinese economy could overshadow Burberry’s turnaround progress, says Berenberg

Burberry is trying to reposition itself as an ultra-luxury brand but a slowdown in the Chinese economy means the fashion house is beginning its transition within a tricky macro environment
burberry store
The first collection from Burberry’s new designer is due next month

Fears over the strength of the Chinese economy could weigh on sentiment for Burberry PLC (LON:BRBY), the British fashion house in turnaround mode under its new boss and chief designer.

CEO Marco Gobbetti succeeded Christopher Bailey in the summer of 2017, while Ricardo Tischi took over Bailey’s role as chief designer last March.

READ: Burberry's restructuring will take time, says Kepler

The duo has been working to make Burberry an even more luxury and exclusive brand – a part of the market that has proved resilient in a wider retail market that is struggling.

Much of that resilience has stemmed from China, where total wealth has surged by 1,300% since the turn of the millennium. That’s more than double the rate of any other nation, according to Bloomberg.

China’s newly-minted millionaires have shown themselves to be big buyers of European luxury goods, making them a key demographic for the likes of Burberry, Louis Vuitton and co.

But recent data has pointed to a slowdown in the Chinese economy, not helped by the ongoing trade war with the US, which could hold Burberry back at an important time in its evolution.

“Investors continue to fear a crash in Chinese luxury consumption, similar to the post-2012 downturn that followed China’s anti-corruption campaign,” read a note to clients.

Risks to overshadow opportunities

The analysts reckon these fears are overdone but acknowledge that now is not the best time be undertaking a restructuring, as Burberry is.

“We continue to believe that Burberry, led by a strong management team, offers one of the most exciting restructuring stories in the luxury goods sector.

“However, with the company beginning its transition in a less certain macro environment, we fear that near-term risks may overshadow the opportunities.”

As a result, Berenberg has slashed its price target to 1,920p (from 2,270p) and downgraded the stock to ‘hold’ from ‘buy’.

Burberry shares were down 2.2% to 1,751p in mid-morning trading in London.

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