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Burberry downgraded by Jefferies after shares jump on well-received trading update

Jefferies cut its rating on Burberry to ‘underperform’ from ‘hold’ but raised its target price to 2,000p from 1,800p.

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Burberry was a top riser on the FTSE 100 on Wednesday

Burberry Group PLC (LON:BURB) shares continued to rise on Wednesday after a well-received first-quarter trading update, leading to a downgrade by Jefferies.

The luxury fashion retailer on Tuesday reported a 4% rise in like-for-like sales to £498mln for the 13 weeks ended 29 June, citing an “excellent consumer response” to the debut collection from new chief designer Riccardo Tisci.

Analysts were expecting a 2% increase in like-for-like sales for the period.

READ: Burberry tops first-quarter forecasts amid “excellent” response to Tisci’s debut collection

Following a 17% rise in the share price since the update, Jefferies has cut its rating on the stock to ‘underperform’ from ‘hold’ but raised its target price to 2,000p from 1,800p.

“Much as we remain supporters of Burberry’s management strategy, we think the stock now prices in a very optimistic scenario and trades at a significant premium to peers in the absence of a very strong 2020-21 performance (i.e. needs close to double digit like-for-like sales growth to even justify this today),” Jefferies said.

“Visibility is limited and the magnitude of ongoing challenges do not support this premium at this time: we increase our price target by 11% to £20.0 but cut our rating to underperform as a pure valuation call.”

Easy comparatives in first quarter 

Jefferies thinks year-on-year comparisons were misleading in the quarterly results as they entail benchmarking an “aggressively launched” new logo in its infancy against a period of “lacklustre and directionless” performance.

There were easy comparatives across the board including the group’s key market of China, which grew by a low single digit percentage last year, Jefferies said.

China sales rose by a “mid-teens” percentage in the first quarter.

“Apparel dynamics are better but we are already seeing markdowns and it is far too early to take a view on the real challenge: leather goods,” Jefferies said.

As part of its overhaul, Burberry has been trying to take its brand more upmarket and improve the improve the performance of its handbags and leather accessories, which have lagged behind rivals.

Burberry needs success within leather goods

Jefferies thinks only a “very successful” leather goods full-price sell-out can lift sales densities.

However, it added: “Discounting is still widespread and supply chain and excluding-China performance remain weak: we think growth is still coming at a cost to margins.

“The brand is in transition and as newness becomes mainline Burberry’s weaknesses will become more relevant.”

In the second quarter, Jefferies believes the period is likely to deliver similar trends as the first three months of the year given an “almost identical” set of undemanding comparatives.

Shares rose 3.3% to 2,353p in midday trading.

Quick facts: Burberry Group PLC

Price: 2099 GBX

LSE:BRBY
Market: LSE
Market Cap: £8.54 billion
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