Following a revolt by Burberry's shareholders over the pay package for new chief executive Christopher Bailey, the luxury goods group is under the cosh again, this time from the stock market.
Its shares have slipped 20p to £14.32 in what is otherwise a fairly upbeat FTSE 100, not helped by downbeat not from Berenberg. The bank's analyst John Guy issued a hold note with a £15.50 price target, saying:
On a PE-relative basis, Burberry is below its seven-year average, which may appear harsh given the underlying resilience of the top line. However, the risk of lacklustre earnings leverage persists to 2017 due to currency headwinds in 2015, the loss of Japanese profit associated with the licence termination from June 2015, incremental costs on the back of the roll-out of the Japanese global product offering and gross margin dilution as the Beauty sales footprint expands.
Currency is the principal headline earnings dilutor in 2015. According to our estimates, Burberry has around 50% operating expense exposure to sterling and does not hedge translational sales. The recent sterling appreciation from May to July has resulted in an additional £15m negative retail/wholesale EBIT effect, taking the 2015 total impact to £55m should spot rates remain at constant levels. Moreover, there is no change to expectations of a £10m decrease to licence revenues.
We believe that recently appointed chief executive Christopher Bailey has the commercial acumen and creative credentials to take the Burberry brand into its next phase of profitable growth. However, we acknowledge that the path to operational excellence may be harder to navigate against the backdrop of incremental cost pressure (Japan, digital-related investments, costs associated with Chinese ex-franchise store renovations and the Beauty roll out).