Stock in Focus: Burberry

Being the largest publicly traded British luxury fashion house sets the company apart internationally where the company garners more attention than smaller British brands

Paul Swinand 17 July, 2014 | 11:18AM
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Possessing a brand with recognizable fashion elements such as its iconic plaids and a history of innovations, including patenting the trench coat and creating the fabric gabardine, the Burberry (BRBY) brand is a source of economic returns, in our view, that is hard for competitors to encroach on.

The company exhibits high gross margins (around 70%) and operating margins in the high-teen to low-20% range, and we believe Burberry is again on the forefront of innovation. The company is smaller than many of its global peers, but has been doing unique marketing and developing differentiated customer experiences as it grows, and will continue to take control of international distribution and as well as expand its product lines.

Being the largest publicly traded British luxury fashion house also sets the company apart, in our view, especially internationally, where the company garners more attention than smaller British brands. We believe its brand, designs, and recognisable fashion elements occupy a unique space in customers' minds, giving it a defensible niche in luxury and earning it a wide economic moat.

We look favourably on the company's growth and profit improvement strategies to leverage the core brand, to elevate Burberry's image and average prices, to focus on new markets, to continue to leverage company-operated retail locations for growth, and to invest in operations. We believe selling, general, and administrative costs are one place investors could see additional operating leverage over the long run where size and scale will make it harder for smaller luxury houses to compete.

Regarding its retail strategy, we view Burberry's current build-out and the increase in grand-space flagship stores as a positive, and also call out the company's efforts in digital engagement. Flagship and large-format stores are in major cities and tourist destinations, and we see the ability to secure large and unique spaces in the world's top cities as a long-run competitive advantage for luxury companies such as Burberry. On the negative side, retail investments raise gross margins, but also carry additional SG&A costs, increased inventory investment, and fixed investment risk.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Burberry Group PLC1,035.50 GBX2.58Rating

About Author

Paul Swinand  is an equity analyst at Morningstar covering department stores, luxury goods, sporting goods, apparel and footwear.

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