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The Burberry, an consumer sector stock’s share price has fallen by 70% over the past year, raising questions about the company's future. The central concern is whether Burberry's shares will recover or if deeper issues within the business are contributing to this decline.
Challenges Facing Burberry
The phrase "out of fashion" has often been used to describe Burberry (LSE:BRBY)'s current situation, and while it may be overused, it seems to accurately reflect the company's recent performance. Burberry's difficulties are well-known. The brand’s position as a luxury, rather than ultra-luxury, label has left it vulnerable to the pressures of the cost of living crisis, particularly in key markets like China.
Additionally, Burberry’s strategy to drive growth by focusing on accessories, such as leather bags, has not met expectations. The luxury bags market has faced challenges, and consumers with the means to spend have tended to gravitate towards more established names like Louis Vuitton and Hermès. Consequently, Burberry's sales have declined by 21%, and earnings per share (EPS) are anticipated to drop from £1.23 in 2022 to just 17p this year. The key question is what the future holds for the company.
While b do predict a rise in Burberry's profits, they do not expect a return to 2022 levels in the near future. Despite this, the average price target for the shares is 20% higher than the current price.
Projections indicate that Burberry’s EPS could reach 41p in 2025, with further growth to 80p by 2027. Given the current share price of £6.64, this would suggest a price-to-earnings (P/E) ratio of 8 by 2027. If Burberry achieves this level of earnings recovery, the company may also resume paying dividends. Historically, Burberry has distributed around half of its earnings to shareholders over the last decade. Based on this trend, a dividend yielding 6% annually by 2027 could be possible if the projections hold true.
Considering a Recovery
Some might view Burberry as a potential beneficiary of a broader recovery in consumer spending. However, certain risks must be taken into account.
One notable risk is Burberry's significant exposure to China, which accounted for about 25% of its revenue when sales peaked in 2022. This concentration means that the company's performance is closely tied to the economic outlook in China. Those optimistic about the region's future might see Burberry as a strong option, while those with a more cautious view may prefer to explore other opportunities.
