This morning (14 July) saw the release of first quarter earnings for Burberry (LSE:BRBY). The high-end fashion house posted strong figures in what appears to be a continued recovery from the pandemic. Burberry shares remain relatively unchanged on the day, but have been volatile over the past year. If I’d invested a year back, here’s what my current profit/loss would be, along with how I think things could go from here.
Much better gains than the FTSE 100
If I assume that I’d invested £1,000 this time last year, I’d be happy with the outcome today. The stock is up 27% over this period. This means my £1,000 would currently be worth £1,270. The value has been higher than this in 2023. But the 18% fall over the past three months has somewhat detracted from what has been a stellar H1 for the company.
Before we get on to the reasons for the move higher, it’s important to note the gain over the past year against benchmarks. After all, is a 27% return good for this period?
Let’s take the FTSE 100 index. Over the same period, it has risen by 4.1%. So clearly Burberry has massively outperformed the wider index.
The FTSE 100 doesn’t really have another luxury fashion brand to compare Burberry to. Rather, I’ve used LVMH Group, which owns Louis Vuitton. The stock has jumped 46% over the past year. So although I should be happy with the gains, it isn’t the top performer in the sector.
Strong demand from Asia
The main reason for both Burberry and the wider fashion sector doing well has been due to a surge in client demand. This might sound odd, especially considering here in the UK we’ve got a cost-of-living crisis.
Yet as the Q1 trading update showed, demand is coming from elsewhere. The year-on-year change in store sales showed Japan up 44% and South Asia Pacific up 39%. More impressive was the 46% growth for mainland China!
Given that China was one of the last countries to properly reopen after the pandemic, Burberry is only now starting to feel the benefit to revenue. Sure, it has been a long road. But now I feel the stock could be poised to move higher for the rest of the year as investors bet on China continuing to lead demand for the business.
Not sure about expanded physical locations
One risk that I do see is the large amount that Burberry is spending on refurbishing or opening new physical locations. This includes a revamp of the UK flagship store on New Bond Street in London.
The firm has been benefiting from online sales, so I’m not sure I completely agree with the push on locations. These are expensive and an added cost for the bottom line that surely could be mimimised.
Overall, Burberry shares would have pocketed me a pretty penny over the past year. Yet I think the move can continue in the next year and so am considering picking up some of the stock.
