Burberry Earnings: Gets Strong Profit Boost But Needs More Investments This Year To Fuel Growth

We plan to adjust our fair value for narrow-moat Burberry BRBY to incorporate full-year results, after the company reported revenue 3.5% above our forecasts and a more-significant-than-expected improvement in profits. After yesterday’s price declines, we see shares to be approximately fairly valued.

Revenue was up 5% at constant currency and 10% reported for the full year ended March 2023. Adjusted operating margin improved to 20.5%, by 200 basis points from the previous year, helped by reduction of administrative costs—even as gross margin came slightly under pressure through raw material price increases not being fully offset by pricing. For the fiscal year 2024, the company targets high-single-digit revenue CAGR from fiscal year 2020 (implying low-teens growth in fiscal 2024) and around 20% operating margin (in line with current levels). More will be spent on marketing and store refurbishments to boost brand appeal under Chief Creative Officer Daniel Lee’s leadership. The new designer collections will start hitting the stores in the end of the second quarter.

In the fourth quarter of fiscal 2023, Burberry saw its comparable sales up by 16% year over year (slightly above average for previously reported peers), with 13% growth in mainland China (23% growth for Chinese nationals’ purchases at home and abroad); 27% growth in the Europe, Middle East, India, and Africa region, helped by growth in tourism (over 40% tourist sales in the fiscal year versus 25% the year before); and Americas being down 7%. Like some peers, Burberry saw its entry-price products perform weakly in the U.S. market. We have previously thought that very strong recent growth in the Americas region for luxury brands was helped by various nonrecurring tailwinds (payment checks, savings from foregone travel and other experiences, and strong asset prices) and saw more downside for the demand in this market, which first calendar quarter sales figures for most luxury players seem to confirm.