Burberry Shares Still Cheap Despite New CEO Boost

Former boss at Celine, Marco Gobbetti has been appointed chief executive of Burberry causing the shares to bounce 8%

Paul Swinand 12 July, 2016 | 10:39AM
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Burberry (BRBY) announced a number of management changes just before the company’s fiscal first-quarter update. The timing of the changes highlights the near-term struggles of both the firm and the luxury industry but does little to change our long-term view that Burberry is a valuable business, with solid long-run cash flows and sustainable returns on capital.

Burberry’s image is hard to copy and is ultimately what has helped it through past difficulties

Former boss at Celine, Marco Gobbetti has been appointed chief executive, and Julie Brown will leave Smith & Nephew to take on the roles of chief operating officer and chief financial officer.

Burberry head designer Christopher Bailey, who is currently serving as chief executive, will remain on the board as president and remain in his chief creative officer role. Former chief financial officer Carol Fairweather will resign her post at the end of the year. While Bailey had likely been under pressure given the performance of Burberry shares in the past 12 months, we do not see Burberry as completely lagging the industry.

True, some firms such as LVMH (LVMH) and Hermes (RMS) have fared better, but others, from Prada to Coach have experienced deeper revenue and share price declines. Hard luxury firms and watchmakers have also had significant declines in share price, as have diamond jewellery retailers such as Tiffany and we assess Burberry to be roughly middle of the pack.

With our wide moat rating based on Burberry’s 160-year-old brand, we believe that new management appointments and the new management structure should be helpful in navigating what has proved to be a difficult time in luxury.

But we also believe that it is the intangible asset of Burberry’s image that is hard to copy and ultimately what has helped it through past difficulties. Although shares have risen with the announcement, we estimate that their fair value today is £15.50 and thus we still see them as undervalued. We will wait for the soon-to-be-announced first-quarter trading update before adjusting our valuation model.

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
Burberry Group PLC1,569.00 GBX-0.51Rating
Hermes International SA1,020.50 EUR-0.97Rating
LVMH Moet Hennessy Louis Vuitton SE549.40 EUR-0.69

About Author

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