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Burberry weak as Goldman Sachs cuts to 'sell' on luxury firm’s demanding valuation, higher investment expectations

The US investment bank also reduced its price target for the FTSE 100-listed firm to 1,855p from 2,148p, with the stock currently trading at 1,903.50p, down 2.6%
Burberry scarf
Goldman's analysts pointed out: “With new product now entering stores, we see this as the time for Burberry to focus on capturing share in a competitive market”

Goldman Sachs has downgraded its rating for Burberry PLC (LON:BRBY) to 'sell' from 'neutral' pointing to the luxury brands firm’s demanding valuation and expectations for higher investment to stimulate sales growth.

The US investment bank also reduced its price target for the FTSE 100-listed firm to 1,855p from 2,148p, with the stock currently trading at 1,903.50p, down 2.6% on Tuesday’s close.

READ: Burberry sales drop over Christmas trading period as it carries out brand makeover

In a note to clients, the Goldman analysts said, while they like the long-term equity story at Burberry, they expect that activity to reinvigorate sales momentum will encourage higher incremental investment near-term.

The analysts noted: “With new product now entering stores, we see this as the time for Burberry to focus on capturing share in a competitive market.”

They added: "We now look for 7% growth in operating costs (ex-licensing) in FY20-21 (was +5%), driven by higher discretionary spend (marketing, sales), which we expect to accelerate in 2H20."

The Goldman analysts cut their 2020 and 2021 earnings per share estimates for Burberry by 11% and 18% respectively, while their adjusted underlying earnings (EBIT) estimate for 2019 remains broadly unchanged at £435.5mln, but assumes a modest drop of around 2% to £425mln in 2020.

The analysts pointed out that with Burberry shares trading on a current year price-to-earnings of 24x and EV/EBIT of 17.2x - versus peers at 22x and 15x - the valuation looks demanding.

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