Is it worth buying shares in Burberry? Your options explained

Burberry has been in the doghouse for the past year. The 168-year-old company has suffered amid a wider downturn in the luxury fashion industry and struggled to warm investors to its project to revamp the brand. But shares in the FTSE 250 group bounced last week — they are now more than 50 per cent higher than their lows in September — after its new chief executive laid out a fresh strategic plan.
Figures for the first half of its financial year were brutal. Revenue fell 22 per cent to £1.1 billion in the six months to September 28, compared with the first half of last year, dragged down by weaker performance in the US and Asia. The group recorded a pre-tax loss of £80 million for the period, against a £219 million profit last time, some of that loss being down to a £29 million charge for unsold inventory. Net debt stood at £278 million, compared with £63 million net cash a year ago.
The market has found reason for hope, however, under the new boss, Joshua Schulman, who joined this summer after leading the US fashion brands Michael Kors and Coach. His expertise does not come cheap: he is getting a base salary of £1.2 million plus target bonuses, along with a £3.6 million sign-on award, based on performance, that is due to vest three years from now.
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Schulman’s idea is the “Burberry Forward” plan: a £40 million cost-saving programme and a target to get back to £3 billion in annual revenue. For context, under Burberry’s last management, it had a £5 billion long-term revenue target. It is expected to reach less than half that level by the end of its financial year in March, according to estimates compiled by FactSet.
Schulman has also said that Burberry will continue to be a luxury brand, rather than an “accessible” one, amid suggestions from some analysts that it could become the “British Coach”. He did say, though, that Burberry would have a wider range of price points, including lower ones in certain categories, such as leather handbags.
A promise to focus more on its heritage trenchcoat should help Burberry stakeholders across the board: designers, investors and customers alike. Indeed, Schulman acknowledged last week that part of the company’s underperformance had been due to “inconsistent brand execution”. A pivot to Burberry’s classic outwear should help to recover some of its elusive “cool” factor — a frustratingly intangible, core part of its investment case — although the market positioning still looks a little unclear, with top-end coats as well as plans for cheaper handbags.
Still, a promise to go back to basics has gone down well with investors, despite those gnarly first-half numbers. Analysts at Deutsche Bank suggested that some of the share price reaction may have also been due to some short position covering. The fashion house remains one of the most shorted stocks in London, with about 6 per cent of its shares in float being used to bet that the price will fall.
This column last rated the FTSE 250 business as a hold in May, and even with the recent bounce in the shares they are still down by about 15 per cent. The same reasons for caution remain: a brand-revamp project that has not delivered any change to its bottom line and the absence of any meaningful timeline for its goals. Burberry is a relatively small fish fighting for survival in a big pond: with a market capitalisation of £3 billion it is dwarfed by giants such as LVMH at €295 billion and Kering at €27 billion.
Gerry Murphy, its chairman, has previously admitted that Burberry “probably went a bit too far, too fast” with its premium push. It may yet take a while for the brand to remake its image. The spike in the shares also feels rather disconnected from the rest of the luxury sector, which remains subdued because of a fragile market in China.
Advice Hold
Why Potential to rebuild reputation but earnings may be under pressure for a while
Elsewhere in the FTSE 250, Law Debenture is quietly making gains, with the £1 billion investment trust one of the few in its sector to now trade at a premium to its net assets.
The fund, first set up in 1889, invests predominantly in British stocks to grow investors’ money and provide them with an improving income. But prospective investors should beware — this trust is not like its peers.
Although 80 per cent of its assets are invested in stocks, the rest comprises its ownership of its professional services company. This business specialises in pension trustees, company secretarial and whistleblowing services, so any shareholder in the trust will also have exposure to this part of the business. But it has proved lucrative, having funded just over a third of the fund’s dividends over the past ten years.
The investment portfolio itself is controlled by the asset manager Janus Henderson. Its biggest single holding was Flutter Entertainment, making up 3.5 per cent of its portfolio as of the end of October. That was followed by Shell and HSBC at 3.1 per cent and 3 per cent respectively. Most of the companies that the trust invests in are listed in London, although about 5 per cent is invested in North America, 6 per cent in Europe and just over 1 per cent in Japan.
This column last rated Law Debenture as a buy in May, when it traded at a discount of 0.9 per cent. It now trades at a small premium of 1.3 per cent, having delivered a modest total return of 4 per cent within the space of six months.
Its income stream looks healthy too, most recently increasing its half-year dividend by 4.9 per cent to 8p per share, taking its yield to 3.6 per cent.
The fund’s well-supported cash payouts and robust record for returns means it is now just one of two investment companies that specialise in British dividend-paying stocks that trade at a premium to NAV.
The other is the Chelverton UK Dividend Trust, which has a yield of 7.8 per cent but is much smaller, with total assets of just £36 million as of the end of September and a premium of 3 per cent. Law Debenture looks the more reliable pick of the two.
Advice Buy
Why High-quality portfolio of British stocks