Upmarket fashion firm Burberry was a top FTSE 100 faller on 13 May, when the company published its 2020/21 results. So I’m intrigued to see that this popular stock now qualifies for the relaxed version of my SIF buying screen.
It seems that when Stockopedia’s computers digested Burberry’s latest accounts, the firm’s value, quality and momentum metrics came more closely into line with the affordable growth remit of the SIF portfolio.
To recap briefly, trading in the SIF portfolio is governed by a set of rules. I select shares to buy from my buying screen. Periodically, this screen dries up and does not provide any new opportunities. If such a dry spell extends for four weeks, then I relax my valuation criteria slightly to broaden the pool of potential purchases. It’s this relaxed screen that Burberry now qualifies for.
Why do I like Burberry?
Most of the big European luxury brands have been consolidated into larger groups. Kering and LVMH are probably most relevant to Burberry (LON:BRBY) shareholders. These two French groups control many of Europe’s best-known luxury brands.
Like Burberry, these luxury groups trade on their European heritage, but generate much of their income from Asia, especially China.
I think it’s possible that Burberry will one day be acquired by Kering or LVMH. In the meantime, I’m attracted to the group’s 165-year history, strong brand, and high profitability. Broadly speaking, my view is that only modest sales growth is needed to generate attractive shareholder returns.
Growth plus increased premiumisation are the twin goals of CEO Marco Gobbetti’s turnaround strategy. Since recruiting chief designer Riccardo Tisci in 2018, the pair have launched well-received new product ranges which have supported an increase in full-price sales.
This year will see discounting banished altogether from the group’s main stores, in a continued effort to move the brand further upmarket.
One point to note is that Burberry’s fiscal year runs from April-March. This means that the last two financial years have both been disrupted significantly by Covid-19 (given the earlier onset in China).
As a result, the company has not yet managed to achieve a return to top-line growth. Indeed, Burberry’s revenue has fallen every year since 2017. The company’s adjusted profits are also still below the record highs seen in 2017 and 2018.
Mr Gobbetti still has much to prove. But I…
