Burberry v Asos: How Lockdown Hit Fashion

Burberry sales nearly halve on last year, but Asos benefits from the stay-at-home delivery boom 

James Gard 15 July, 2020 | 12:08AM
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Burberry shop

Latest results from Burberry (BRBY) and Asos (ASC) have given investors an insight into how fashion retailers have performed during lockdown as well as the state of consumer spending across the world – and in particular how China’s economy is recovering from the Covid-19 crisis.

Luxury fashion retailer Burberry revealed retail sales had almost halved in the three months to the end of June, causing its shares to drop 7%. But there were big differences between regions – while sales in Asia Pacific market were down 10% on the year before, the picture in the US and Europe was far more concerning, with sales down 70% and 75% respectively as international travel ground to a halt and airport concessions closed.

Chinese shoppers are vital to Burberry’s prospects, and some analysts say it was at least encouraging that sales in the country for June were higher than before the coronavirus crisis. With China first to go into and come out of lockdown, and with massive financial stimulus from its government, the country’s stock market has been one of the strongest.

Still, the company is still vulnerable to events outside its control, says Nicholas Hyett, equity analyst at Hargreaves Lansdown. “With some stores likely to remain closed, travel restrictions still in place and a second wave of infections always a danger, the pain could be protracted,” he says.

And the company’s performance has lagged other luxury firms this year, says Chris Beckett, head of equity research at Quilter Cheviot. “Burberry still has its attractions as a unique stock in the UK market longer term, but currently comparisons in an international context are not favourable,” he says.

Beyond the current malaise, Morningstar analyst Jelena Sokolova says Burberry should benefit from rising incomes in emerging markets like China, India and Latin America.

Burberry’s shares are off around 35% and the latest fall takes the shares even further below their fair value of £18.40, according to Morningstar analysis. It will be a blow to managers such as Nick Train - Burberry is among the largest holdings in his Silver-rated Finsbury Growth & Income Trust (FGIT). Train recently joked that he would celebrate the end of the coronavirus crisis by buying a Burberry trench coat and “downing several bottles of cognac”.

Asos in the Middle

As an online-only store, Asos has had a better lockdown than Burberry with sales up 9% over the past four months to £1 billion. The boom in e-commerce this year has helped the Aim-listed company increase sales, as stuck-at-home shoppers bought casualwear rather than party clothes.

But ongoing warehouse issues mean the firm wasn’t able to react to demand, says AJ Bell investment director Russ Mould. “Weaker demand for dresses and formalwear made sense given people weren’t going out for a night on the town. Unfortunately, Asos didn’t have enough supplies of what customers wanted instead, namely casualwear,” he says.

Asos shares are roughly flat so far this year at £32 and way below the £70-plus levels seen two years ago. But they crashed to£10 in the March sell-off. "After more than tripling since the lows this year, we see ASOS' shares trading approximately in line with our fair value estimate and would wait for a better entry point," says Morningstar’s Sokolova.

although the company’s uncertainty rating is very high because the fashion market is so competitive. “Fast fashion” is now in the spotlight after Asos rival Boohoo (BOO) uncovered problems with pay and working conditions at its UK factories.

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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James Gard

James Gard  is senior editor for Morningstar.co.uk


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